§ Order for Second Reading read.
§ 11.5 a.m.
§ The Financial Secretary to the Treasury (Mr. Harold Lever)
I beg to move, That the Bill be now read a Second time.
It is rare that one can claim that on a Friday morning in this House our discussions range over matters of world historic importance. We can justly do so today, because the Bill before us gives statutory blessing to the special drawing rights scheme which all the major world monetary powers have agreed to bring into operation. The special drawing rights will be the first international reserve asset in history, consciously created and planned by Governments and central bankers to help finance and develop world trade and advance world prosperity. These rights will be an acceptable supplement to the existing world reserves of gold and currency. They will be transferable assets, subject to appropriate rules.
Their value will be defined in terms of gold. Hence the description"paper gold" which some commentators have applied to these assets, is not without justification. When the special drawing rights have acquired full acceptability, and established their place in the world monetary system, it will be open to the countries of the world to extend the system by collective action. We have the real prospect of the world exercising control over the level of international liquidity, which will no longer be dependent on the accidents and hazards of the supply of gold or reserve currencies.
This development has for long been the dream of forward-looking economists 956 and in this scheme we are on the eve of the beginning of its fulfilment. Keynes and others, long ago saw that the successful and conscious control of national monetary affairs could only long endure if it were matched by appropriate developments in the international monetary sphere. Here, we take this step with the general and detailed approval of almost all the great monetary nations of the world.
It is right that we should give credit for this development to those who have played a leading part in it. In particular, I must pay tribute to the rôle of my right hon. Friend the former Chancellor, who played a notable part in nursing and bringing to a final conclusion the international arrangements which have set this scheme on its way. One of the memories he will most cherish is the work which he successfully accomplished. We are all very grateful to him.
It would be churlish not to acknowledge the forward-looking thought and action on the part of the right hon. Member for Barnet (Mr. Maudling) while he was in office, for planning along these lines. I know that this was much in his mind and he consistently gave his support to the kind of concepts which have reached more concrete fruition in this scheme. We have also to give a measure of credit to the world monetary authorities, to the much-maligned Treasury officials, and the Bank of England officials, whose devoted work has been a great contribution to the success of the S.D.R. scheme. Our Bank of England in particular played a leading and notable part.
Here I may say that it has always seemed to me to be odd that so many of those who are in the vanguard in recognising the need for collective security in other areas have been so slow to recognise and support the efforts to create the collective institutions and the system of security we require in the economic monetary sphere. They seem to find it hard to accept that the central bankers of the modern world have been among the most progressive forces, contributing to the phenomenal growth of prosperity in world trade in the last 20 years. They have made efforts to fashion the country's monetary organs to accommodate the rising expectations, and have take action to deal with the threatening financial and economic crises, and to 957 maintain a high level of employment, rising wages and increased standards of life. Probably some of these colleagues see the modern central bankers in the light in which most of us see the bankers of the inter-war years, with their blindness to the needs of the modern world and their adherence to outworn doctrines and reactionary concepts. Nothing could be more unrelated to the realities of what has happened in the monetary field in recent years.
Indeed, some politicians'approach to the modern central bankers would have been appropriate to those of whom I have spoken in the inter-war years; they are just fighting the last monetary and economic war which, alas, unhappily, we lost in the inter-war years, with such cruel consequences for so many countries.
Here I should say that the creation of S.D.R.s in no way reduces the obligation of individual countries to put their affairs to order. Indeed, the great advantage which S.D.Rs offer to us and other countries is that they make the stake in maintaining international financial stability even larger—we know we are solving our problems when we put our affairs to order and are making a contribution to world stability, too. From the United Kingdom point of view, therefore, we cannot regard S.D.R.s as a means of solving our immediate balance of payments problems. S.D.Rs are not, as is sometimes said abroad, another line of credit to allow us to live in deficit. On the contrary the budgetary and other measures already taken show that Britain is absolutely determined to live within her means. The still present deficit which we are running is the deficit of a country fighting to move into surplus after devaluation. One must allow for the temporary adverse trends in the terms of trade following devaluation, for some stock building heightened as a result of the period of monetary instability through which we are passing.
These factors cannot be erased very quickly and we must not, therefore, bank on spectacularly better figures in the next month or two, but it remains certain that, on both the export and import sides of our balance, we shall move into a completely transformed position by 1969, given no untoward events at home or abroad of a major character.
I shall now give the House a brief 958 description of S.D.R.s themselves. I shall be happy to answer questions of detail raised during the debate if, with the permission of the House, I can speak briefly at the end. The essence of the S.D.R.s is that they will be created by the International Monetary Fund without any subscription of gold or currencies by countries which take part in the scheme, and will be fully transferable assets, subject to appropriate rules. This is the most important difference between S.D.R.s and the existing drawing rights in the Fund. The transferability does not, of course, mean that the S.D.R.s scheme is an unconditional licence to print money on an international scale. S.D.R.s will be allocated in proportion to Fund quotas and the amount to be created at any one time and the way in which they will be allocated will be matters for the Fund to decide collectively. In any decision of the Fund of the amount of S.D.R.s to be created and allocated, the crucial factor will be the judgment of the Fund about the world's total need for new liquidity.
It follows that S.D.R.s cannot be called into being simply to solve a situation of a balance of payments problem. It is fundamental to the scheme and a precondition of its activation that participating countries should take positive measures towards restoring equilibrium to their balance of payments. The S.D.R.s scheme will stand on the foundations of the existing monetary system and it is correspondingly vital that we should ensure that that is a stable foundation. Therefore, I repeat, the measures which we have taken to correct our own balance of payments and the measures which the Americans are now taking are major contributions to this stability.
§ Mr. J. Bruce-Gardyne (South Angus)
Before the hon. Gentleman leaves the subject of the constitution of S.D.R.s, can he give some indication of the Government's estimate of the sort of first quantities which might be involved? I appreciate that this does not lie within the Government's judgment, but can the hon. Gentleman give some sort of estimate?
§ Mr. Lever
The hon. Gentleman is asking me to form a questionable psychoanalysis of all the many countries which will be involved in this decision. All I can say is that the figures which have 959 been talked about—and I would not go beyond saying that—range between one billion dollars and five billion dollars as the first tranche issued over, say, the first one to five years of the scheme.
§ Mr. Ronald Bell (Buckinghamshire, South)
When the hon. Gentleman speaks of one billion dollars and five billion dollars, does he mean 1,000 million dollars and 5,000 million dollars, or is he talking English?
§ Mr. Lever
I meant between 1,000 million dollars and 5,000 million dollars as being the kind of figures talked about as the first issue in the first five years of the scheme. But this is very much a matter for the judgment of the cooperating nations and whether it is more or less will depend on their judgment collectively and what the world's liquidity needs are, having regard to the balance of payments stiuation.
The purpose of the Bill is to give effect in a statutory way to the powers of the Government to operate the scheme, rather like the procedure used for the Bretton Woods Agreement of 1943. This allows certain appropriate amendments of the International Monetary Fund articles with which I will not deal unless hon. Members require it. It will be a few months before amendments can be accepted by a sufficient majority of members. Thereafter, under the normal rules of the Fund another three months must elapse before the amendments enter into force.
Finally, the first decision to allocate special drawing rights will be collective, requiring an 85 per cent. majority of the Fund's voting power. At this range one can only guess at the interval which may elapse before the Fund feels able to take the final decisions, but, clearly, the efforts which we and the Americans are now making to improve the balance of payments of the two reserve currencies give ground for hope that the decision to operate the scheme need not be long delayed. Taking account of this and the time required to complete the process of amending the articles of the Fund, it might not be wildly optimistic to look for the first appearance of special drawing rights on the international payments scene in the early part of 1969.
960 In conclusion, I turn once again to the broader view of this matter. I suggest to the House that the world now stands at an historic turning point in the development of its economic and monetary affairs. Either we move forward by means of advancing still further the international financial co-operation in our monetary system, which has enabled us and other countries to finance the continuing growth of world trade and the unprecedented levels of prosperity which the world has enjoyed since the war, or we may be tempted by deceptively easy solutions into restrictions on trade or other actions of that kind which bring with them inevitably limitations on the development of world trade and thus inescapable reductions in the prosperity which we might otherwise have enjoyed. In the world as a whole there can be no doubt that the first alternative offers the greatest rewards. For us in particular the matter is even more certain, for our dependence on world trade is much greater than that of almost any other country.
I therefore commend the Bill to the House, because it supports a scheme which is not only of aid to the great vital interests which the country has in international trade, but because it is a striking giant stride forward in international monetary co-operation.
§ 11.19 a.m.
§ Mr. Hugh Fraser (Stafford and Stone)
We should all like to congratulate the hon. Gentleman on the modest way in which he has presented the Bill and to join in his tribute to my right hon. Friend the Member for Barnet (Mr. Maudling) and the former Chancellor of the Exchequer. It has been a long road to get us so far. One of the troubles is that by the time one gets to the end of the map one often finds that one is working on a map which is out of date. I think that like myself the hon. Gentleman once saw a very funny film with Bob Hope called "The Road to Rio". I am very much afraid that the road from Rio will prove equally absurd and comic. That is why I want to cast a little doubt on the giant stride to which the hon. Gentleman referred. Until then the hon. Gentleman had been reading carefully from his brief, which, no doubt, the Bank of England and the Treasury carefully 961 prepared, but the hon. Gentleman's natural eloquence swept him away to that unfortunate remark about a giant stride in his last few sentences.
The question of world economic monetary activity is, I suppose, one of the most complicated subjects known to human beings. With the Financial Secretary, I would like to pay tribute to the much maligned dwarfs, giants and other persons who, over the last 20 years, have managed to make this unparalleled advance largely through the management of the world economy, an advance which we have not seen in scale ever before.
I am, however, very much afraid that what is happening is that we are seeing a breakdown, and a very serious one, of the world monetary system. Since I last made a few remarks on this subject, just before the Stockholm conference, it is impossible to say that things have greatly improved.
We have the two-tier gold standard, which is rather questionable in its operation. We have had our own quarterly report on what the balance of payments is likely to be, which projects a very alarming figure. It is true that we have had the Brookings Report and a certain lift-up in industrial morale throughout the country, but a great deal of this comes from the fact that one suffers from euphoria when borrowing money which it is difficult to repay, and some of the industrial euphoria does not reflect in any way the gravity of the international situation here or the world international situation.
We have seen what might be called the bull point for the world economy in the passage of the 10 per cent. surcharge in America, yet at the same time we have seen only today the report that the American balance of payments is again in deficit. I shall not refer to the position of sterling or of the franc or to the general distrust of world currencies and paper currencies. Therefore, my fear is that this giant step forward is a step which is quite irrelevant to the situation today.
In the White Paper, which gives a clear exposition by the Treasury of what it aims to do, there is a certain amount of reference to world liquidity. This is where I must be very serious. The problem of the world today is not a 962 question of liquidity. I considered this subject to be so important that I should get my words right, rather like the Financial Secretary.
In my view, the reference to world liquidity is a misnomer. The problem is much more the growing inconvertibility of the major reserve currencies, not because of their shortage, but because of their surplus. Unless the House and the bankers understand this, we are likely to get into a very serious problem. It is very easy to talk about world liquidity—it sounds lovely—and to produce the new expression "S.D.R.s", but we will not get to the root of the problem in that way. That is why the present system is breaking down.
To put it simply, a maximum dissuasion is exercised on any holder of sterling to spend it outside the sterling area. In the same way, a maximum dissuasion is put on any holder of dollars to convert them into gold. Therefore, the root problem is not liquidity, but inconvertibility. That is why Professor Rueff, who is regarded by so many people in the Treasury as being out of date, is pointing to the precise nature of the growing crisis.
There is a growing movement towards inconvertibility. As the Financial Secretary has said, the trouble is that if we get to that stage, the result will be the sort of ghastly things which could happen in reductions in world trade by people putting up tariff barriers, exercising quotas, and so on, to reduce world trade so as to protect the nominal value of their currency in the world scene.
That is what is happening. We see it happening in France. An extremely strong lobby is growing in the United States for more trade restrictions. These are the real worries of the world. The question of creating special drawing rights has no impact on them. Indeed, it is clear, and it is perfectly fair, as the Financial Secretary said, that whilst we remain in deficit there is no question of our being allowed to draw the S.D.R.s This is one of the problems.
I am sure that right hon. and hon. Members have read the interesting article in the Bank of England Quarterly Bulletin which sums it up very well. The fact is that the people behind it, the deputies of the I.M.F., who were given 963 the task of working out the problem of imbalances, said that there was no solution within the terms of special drawing rights. When the report was handed over to the Third Committee of the E.E.C., that body stated that there would have to be currency rate adjustments. This was absolutely unprintable to the I.M.F. and, therefore, that report was not taken further.
In the same fashion, it is, I think, clear that the Bank of International Settlements in its report cast considerable doubt on what was proposed. World imbalance is the real problem which we have to face today and the Bill is quite irrelevant to it.
When the special drawing rights are likely to be of value is when some stability has been put into the world monetary system. That is not likely to happen next year, but in three years' time or 10 years' time, when we have a better system working, the S.D.R.s might be useful. To raise false hopes merely confuses the problem.
I have always tried to say in this House that the great danger of politicians is that they raise false hopes. They make promises which cannot be fulfilled. I am glad that the Financial Secretary said that we must get our balance of payments right. Certainly, the 85 per cent. of other members of the Fund will not vote for us to draw otherwise.
Therefore, I must revert to what I have said before. There is a grave danger, especially among intellectual economists and among intellectual Chancellors of the Exchequer, that they do not have quite the grasp of reality which I believe to be necessary for the discharge of these functions. We have seen it in the question of devaluation. I was one of those who advocated devalution in 1966. We got it in 1967. We got it, however, from a Chancellor who believed that devaluation in itself was a panacea and who did not take the necessary actions which should have accompanied devaluation to make it work more swiftly. In this we are 6 months behind schedule.
This also applies to what should be done now. I know that the scheme explained by the Financial Secretary has some advantages, but it makes no immediate contribution, although the contri- 964 bution must be made immediately. The first contribution that we can make is to get our own balance of payments right. But in the field of international monetary discussion I believe, as I said when I spoke the last time on this subject, that we should now look seriously at the orderly increase in the price of gold. Unless we look at the orderly increase in the price of gold we shall get a disorderly increase in the price of gold.
I am more and more convinced by events, the turmoils which are happening in the foreign exchange market today, the dangers of people putting up more trade barriers to stop world trade, the false hopes which can be raised by documents such as this, that we have got to have a far more realistic appreciation to what can be done. The best can be the enemy of the good. Of course it would be wonderful if one could have a controlled, brilliant, organised system of international banking which would be inspired by geniuses to iron out the problem, but we have not got these people we have not got the agreement, and I think we are heading for a breakdown of the international economic system unless, at this stage, we move first of all to summoning, as I believe there should be summoned, an international conference, after the American elections, and, secondly, although we are powerless to do it ourselves, we seek with many other European countries to see that a way out—not the way out but a way out —to help the mounting crisis is by an orderly revaluation of gold.
§ Mr. R. B. Cant (Stoke-on-Trent, Central)
I am glad to have the opportunity to speak at this point in the debate as a sort of middle-of-the-road Member of this House, because I think that my hon. Friend the Financial Secretary might, in departing from his brief, if that is what he did—I have not had enough experience of listening to Front Bench speakers to appreciate when they are reading from a brief and when they depart from it—struck a slightly too optimistic note.
I am equally certain that the right hon. Member for Stafford and Stone (Mr. Hugh Fraser) was unduly pessimistic. I though that in his speech there was, to 965 some extent, a sort of inner contradiction. If I use that phrase, I hope that I am not likely to be accused of Marxism.
It seems to me that we have here today a difficult situation because it is something which is extremely difficult to define. I have been looking through one or two Monetary Fund publications containing articles by that eminent student of affairs Mr. Polak, and it is quite obvious, in one he wrote not more than two years ago, that really the liquidity position or crisis did not exist. He thought that liquidity was quite adequate. Then, in his article on the special drawing rights, he extolled the virtues of the special drawing rights very much in the terms of my hon. Friend this morning, that this was a change of mind which might have been inspired more by official requirements than intellectual conversion. I would quote briefly from one of Mr. Polak's articles. In his attempt to define international liquidity, he says:International liquidity may be said to be adequate when it is not so scarce as to force countries to balance their account at the expense of stifling national and international growth, but, at the same time, when it is not so plentiful that countries can continue to run deficits without regard to the international consequences of those deficits in stimulating inflationary pressures abroad.He adds the comment:It is not surprising that there are differing views on a question of such importance.All I would say, without pursuing this problem unduly, is that I think that the right hon. Member for Stafford and Stone must concede, even though he would argue that the problem is one of convertibility and not of liquidity, that it is quite impossible to define the situation which we have had over the last years, and over the last 15 or 16 months, in particular, as a sort of rational basis for an international monetary order.
Let us just take one or two simple figures. If we look at the amount of gold which has left monetary reserves, we see that in 1967 it was 1¼ billion dollars; in the first three months of this year alone, it has been 1 billion dollars. This is money going into "industry "—I put it in inverted commas; into hoards, and so on and so forth. This is point No. 1 as an indictment of the 966 present state of affairs, and nobody can really defend it.
When we add to our sum total of the reserves available to finance international trade, our dollars, which emerge very largely from a dollar deficit which has grown and grown and continues to grow in a completely fortuitous manner, all we can hope for is, in terms of international economic sanity, that this is going to contract and thus reduce the element of liquidity. To introduce another slightly irrational point, we can then say we hope that once the private hoarding of gold turns to dishoarding and as this was financed through the Eurodollar market to a very large extent, then we shall get dollars flowing back into the international financial system and giving us a measure of relief.
Or take our own reserve currency, sterling. This is a prop of international liquidity, although I am very sorry to say that the annual report of the German Central Bank does not mention sterling as one of the great contributors to international reserves. The English disease must have afflicted us to such an extent that the Germans have written us off in this context. Here we have a situation in which everybody is saying that sterling must no longer be a reserve currency, in which certain people, when they see that the Japanese and Chinese will no longer use sterling as an invoicing currency, when they see—
§ Mr. Hugh Fraser
I must remind the hon. Gentleman—what I am happy to report—that the Chinese People's Government have now switched back from the franc to sterling. This is a matter of great elation to us all.
§ Mr. Cant
Yes, well, I wondered whether I should put in that minor point. Having done so, it is a fatal step in my argument. But I think that the right hon. Member for Stafford and Stone would have to agree that this sort of fortuitous basis for international reserves is not adequate.
I have been tempted to flirt with the increase in the price of gold lobby, but this is not quite saying that our problem is not one of liquidity but one of convertibility. If we find a solution to this problem, mainly in terms of increasing liquidity, the solution is, in fact, a 967 solution to be found in terms of a more satisfactory basis for world trade.
I must not detain the House too long. All I would say, in conclusion, is that I do not think that this is a dramatic step forward, but I do think that it is a step to be welcomed. I remember incidents and phrases from my youth, and reading Koestler's "Yogi and the Commissar", in which he says:Reasonable arrangements are not possible in an unreasonable world.Whenever I see a reasonable arrangement appearing on the platform of history, I welcome it, whether it is a giant step forward or whether it is just a small step forward, and I think that this is the attitude which we should adopt in this case.
International monetary economics and affairs are dominated by psycho-pathology, by political considerations, which we know at some time in the future will move off the stage. We know that, just as we have banished gold from any part in our domestic monetary affairs, so the time will come when we shall banish this important metal from our international monetary affairs. Before we do that, it may well be that, if the pessimism of the hon. Member for Stafford and Stone turns out to be the truth, many of our present arrangements will be swept aside and the two-tier system for gold might have to be abandoned in the light of events.
I welcome the Bill. It is a step forward, and I look forward to the day, although perhaps I shall not see it, when we shall have an international monetary arrangement determining degrees of liquidity on a rational basis, and in which the money required for the finance of international trade shall not be determined by this fortuitous chance element in the economic situation but by a community of men making decisions as rational as events make possible.
§ 11.41 a.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
This is an agreeable little debate in that we have in front of us what is virtually a one-line Bill which invites us only to adopt the White Paper Cmnd. 3662, and has given a peg on which to hang some very interesting remarks. It does not interest many of our 968 colleagues, but I cannot blame them for that. It is agreeable to see so many hon. Members of both sides of the House who took part in the Finance Bill debates, which I see were characterised by the hon. Gentleman the Member for Ashton-under-Lyne (Mr. Sheldon) in a letter to The Times as a most glowing testimonial to his own eloquence. I wish to echo that.
The Bill is a machinery Bill, and machinery is something which the House justly prefers to leave to experts. As we shall clearly adopt this piece of machinery, hon. Members have very wisely addressed their remarks to other matters. This piece of machinery is a fine tool of high precision. It is what might be called in mundane terms an instrument of high-precision engineering, but it is not of much use for road mending, and road mending is the problem we now face.
I naturally share the high hopes of the Financial Secretary, but we ought not to be misled by his words. I fear that the only speech in this debate which will see the light of day in the Press will be his, and that there is a danger of an entirely false impression being created. The passing of this Bill will not result in our moving one inch along the road of solving our economic difficulties. Supposing the scheme came into operation, we might perhaps get a vote of special drawing rights and, having received a vote, we could "blow" them in the first two years with the idea of reconstituting our holding the next three years.
I do not know whether or not if that is a starter. Otherwise, it is perfectly clear that the 85 per cent. agreement to the establishment of S.D.R.s will simply not be forthcoming if in our present condition we apply for a special drawing right. I notice that the Financial Secretary nods. Therefore, I think that we can leave this.
This is a very fine instrument for the future. Perhaps the best comparison I can give is to compare it with a ship which is in trouble on the sea. The sailors take to the boats and head for the coast of France, which may be 500 or 1,000 miles away. In this situation it is not very much good giving them the admirable Michelin guides to the best 969 restaurants in Paris. What they want is food and drink. The guide is a useful guide, but it does not meet the needs of the time.
One matter which arises—I hope that I shall not be out of order—in commenting on it, but other hon. Gentlemen have done so—is the belief that a mere rise in the price of gold is itself a panacea. I am sorry to say that this is something which slightly infects the thinking of the extremely well thought out speech made by my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser). He thinks that, somehow or other, if the price of gold were fixed at not 35 dollars, but at 135 dollars, everything would be all right.
§ Sir H. d'Avigdor-Goldsmid
As my right hon. Friend suggested, things might be better than they are at the moment. They would be better for two classes of people. They would be better for the people who own gold, and for the people who mine gold. Those two classes would be better off because they would get a much larger share of the world's market.
§ Mr. Harold Lever
A third highly articulate class of possible beneficiaries would be those who hold gold shares. I am not referring to the hon. Gentleman; I am referring to the newspaper protagonists for an increase in the gold price.
§ Sir H. d'Avigdor-Goldsmid
I am much obliged to the hon. Gentleman for that valuable contribution, which I must say never occurred to me. It has, therefore, become a sort of creed that it is simply an act of obstinacy by the United States that prevents this world panacea from being put into practice, and that is something which we in the House ought to disabuse ourselves of.
Our gold reserves, as the Financial Secretary knows only too well, are a minus quantity, that is to say, we owe more gold than we have, and, therefore, any rise in the price of gold would be an addition to our debt burden and would not diminish it. It may be a very good thing from the point of view of South Africa to increase the price of 970 gold, but it is not a positive advantage to us in our present condition.
§ Mr. Bruce-Gardyne
My hon. Friend says that to change the price of gold would increase our international indebtedness. Would he not agree that this is only on the assumption that we could not obtain a waiver from the gold clause in our international indebtedness, and that it is not inconceivable that this might be possible in these circumstances?
§ Sir H. d'Avigdor-Goldsmid
I do not wish to go into waivers of the gold clauses. I made the simple statement that a rise in the price of gold is not in our national interest, and I have given some modest study to this matter.
§ Mr. Hugh Fraser
Would my hon. and expert Friend agree that from the point of view of the sterling area, on the other hand, an increase in the price of gold could not be dismissed so easily?
§ Sir H. d'Avigdor-Goldsmid
My right hon. Friend refers to the sterling area. It would certainly help Ghana, which is now an external currency country. The impact on Ghana would certainly be important and would improve the purchasing power of the Ghanaians. I do not think that the improvement in the purchasing power of South Africa would have a direct effect on this country, because for many years now South Africa has been entirely outside the sterling area pool.
I am not sufficiently cognisant of the areas of the world where gold is produced, but my right hon. Friend must take it from me that the effect of the countries of the sterling area would be marginal as a result of this major dislocation. I hope that we can leave it at that.
§ Sir H. d'Avigdor-Goldsmid
I think that it is a little unkind of my right hon. Friend to indulge in this continuous barracking.
I do not want to take up the time of the House any further. This debate in these terms could be prolonged indefinitely, but many hon. Members wish to contribute. Clearly, we have here a useful piece of machinery. Let us all 971 hope that we live long enough to see it put to the use for which it is meant.
§ 11.50 a.m.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
One feature which has been fairly clear throughout the debate so far has been the lack of euphoria in our welcome to this Measure. As the right hon. Member for Stafford and Stone (Mr. Hugh Fraser) said, it may be that events have passed considerably further on from the time when this matter was first under discussion. In passing, may I say that it is always pleasant to follow the right hon. Gentleman in his unconventional but always well-thought-out remarks. As usual, they were well worthy of attention.
I see the need for liquidity as something which does not come at present to solve our problems. To a debtor, there always appears to be a shortage of money, and there is not likely to be a very large increase in liquidity when the main reserve currencies are themselves likely to be beneficiaries, since that is the very time when suspicions tend to be at their highest. As a result, it is not likely to be of much advantage to us and to the United States.
Those who point out that the United States position is strong because of its immense wealth and resources and the great power of its economy must remember that, however wealthy the debtor may be, the time comes when the creditor demands his money. When the bills keep coming in for settlement, there comes a time when delay cannot be accepted any longer. So we cannot be surprised if reaction to the United States and demands for it to put its balance of payments in order increase, particularly when one realises the worsening position of the United States and the fact that their external liquid liabilities have increased by 50 per cent. in the years between 1961 and 1967.
In view of that increase in external liability, and even though the deficit has financed so much trade and been of lasting benefit to Europe and the world, we must not be surprised if those countries which have increased their dollar holdings want some period at which such holdings may come to be diminished.
Perhaps more than any other country, we feel that undue pressure should 972 not be put on the United States because of the great things that it has done in the past. The restoration of Europe and the great acts of statesmanship have been almost without parallel in the post-war years. Because of that, we shall always be indebted to the United States, and above all, for the way it has acted in the monetary world.
At the same time, faced with this continuing deficit and faced with the constant rise in dollar holdings, it is reasonable that a time limit should be imposed, even though we understand the great difficulties that the United States has had in reducing the deficit, particularly because of Vietnam.
I want to add my tribute to my right hon. Friend the former Chancellor of the Exchequer for his work in bringing the introduction of S.D.R.s to fruition. Without his efforts, it is probable that we should not be discussing this Bill today, so important was his contribution.
I accept the need for increased liquidity, but I appreciate that there are other matters which are even more serious than that need. I accept the argument about the need to dethrone gold if it can be arranged. I know that an increase in the price of gold would benefit South Africa and Russia, which are countries that we would not wish to favour. Nevertheless, if the alternatives are worse, we must accept the case for such an increase. An even greater danger than benefiting South Africa and Russia is that, if we were to increase the price of gold, we would make it a different kind of commodity. It would then become a commodity which had a built-in protection from inflation, and that would frighten me most of all.
We all hope that it will be possible to dethrone gold at some time in our lives. One of the steps towards it would be to show those who hoard gold that they are holding a fixed price commodity at a time when inflation reduces its value and when they can get no interest by investing in elements of production where its value can be increased. Once it can be shown that there is no virtue in holding gold and that one cannot hope for an increase in its price, and once that message gets home to the peasants of the world, we shall be well on the way to creating an organised increase in liquidity.
973 At the same time, we must be realistic enough to accept that, if the alternative arose whereby we had an excess downturn of trade because of a reduction in liquidity, we all know where our interests lie. However, the time has not come to make a decision of that kind. We must await events, but we should always bear in mine those general considerations.
The good that can come from increasing liquidity has, I think, been overstated. First of all, the proof of an actual shortage of liquidity has never been made out convincingly. We know that the rise in liquidity other than from the dollar and sterling deficits has been small. The increase has come from the deficits and it is held that these have financed the massive increase in world trade. However, it is not as simple as that.
The fact that liquidity is necessary to finance trade is by no means as obvious as is frequently made out. I do not have very much fear that the United States will succeed in reducing its deficit by the amount a number of people fear and so reduce international liquidity. There is in the United States a similar optimism that pervaded the United Kingdom Treasury for so long. When it comes to alter the structure of the balance of payments fundamentally, it will be found to be as hard as we have found it. Although this may be a disadvantage to the United States, as long as the rest of the world accepts it for the time being, it gives us a breathing space.
In the late 1940s we had considerable discussions as to what was the minimum level of reserve required to sustain the country's economy. We know that this figure was pitched far too high, and we have been able to reduce it ever since. This is because the world has changed, the way in which trade is financed has changed fundamentally. The crucial ratio today is not the ratio between the trade of a country and its reserves. It is not true that a given level of reserves is necessary to finance the volume of trade that a country carries out. The whole system of trade and the way credit is financed has changed. The amount of credit in international trade is growing all the time, and there are vastly greater possibilities for this than we have yet imagined.
974 As recently as 20 years ago, the normal method of obtaining payment in many countries was through the letter of credit. This was used in quite advanced countries. Today we have quite normal trade carried out from 30, 90 and even 120-day drafts to what used to be called the most risky countries—to under-developed countries of one kind or another. This is because the means of communication, the operation of the banks in finding out the status of the companies concerned has grown immeasurably along with the information about credit-worthiness. This has led to a massive increase in international credit, which of itself reflects on the need for reserves, about which we have heard so much.
Provided that the economy of the countries are sound, "swap" credits can always be arranged between one country and another. This can be as much as is ever necessary to sustain any increase of trade, which at some hypothetical time in future may be threatened. I do not see the liquidity problem to be quite so pressing. I see it as a marginal and useful matter, but not so pressing.
Because of this I look to see other problems which I consider more important. We know that the International Monetary Fund was set up to promote international trade and exchange stability. This decision was unquestionably right and the prosperity of the world in the post-war years has stemmed from this exchange stability, which helps promote international trade. It means that the trader, exporters as well as importers were able to work out their basis of purchases and sales over a number of years ahead, based on the stability of the exchange rates concerned.
It is because of this that a floating exchange rate would be quite disastrous. It would have an enormous impact on world trade and would mean that at some time in the future, when purchases were being made, no one would know how much they would cost and no one would be able to make long-range contracts. It would mean that instead of concentrating on their export markets, industrialists would become involved with foreign exchange markets, an area in which they were not very competent, which would lead to an extension of people concerned with these rather irrelevant matters.
975 Although before the war the argument was used that one could always hedge in the foreign exchange markets in order to account for the difference of valuation of currencies, we know that in today's sophisticated world it is not possible, because deliveries are being arranged continuously, orders may come in early or late and will upset the very fine judgment necessary in order to be able to hedge successfully in foreign exchange markets. The world in which quantities were put on a boat and then the hedging operation was brought in to pay for this, the time of these simply-made arrangements, has gone. The flow lines and balanced production from which goods are sent to countries all over the world would be disastrously affected by a floating exchange rate.
The greatest dangers to international trade are the difficulties and suspicions of foreign exchanges from time to time. France is feeling the very great effects of pressure on her currency, and on the valuation of that currency. This will happen from time to time. We have had it and got over it, but there will be other countries to come. What has happened is that we have not spent so much time discussing these problems— which might have been capable of solution—as we have in discussing the problems raised by liquidity.
The trouble is that the present system is completely unstable in an important respect. If a currency is wrongly valued, there will be import or export anticipation. This will lead to exchange movements which make it even harder to alter the exchange rate. Once one gets into this vicious circle, as we know, and as the Germans, who had to revalue, know, there becomes necessary a denial of change, a firm commitment to maintain the rate, and so the distortion increases.
A lot of this has been due to the under-estimates by many countries of the effect and power of market forces which still remain. Although we may strongly wish to change some of these forces, it is essential to understand the power with which they operate. We have sometimes misunderstood them. The attempt to maintain the wrong exchange rates was one such misunderstanding. In the matter of bank interest rates the central bankers felt that they had the power to reach 976 international agreement. The extent of their power was exaggerated, and they were not able to control interest rates in the way that they thought. The two-tier gold price system may unfortunately prove to be such a misunderstanding of the market system.
There is unquestionably a certain amount of leakage going on between official and unofficial gold prices, how much we do not know. The market forces may ultimately break through here as well, given sufficient distrust of the world economic system, which I hope we shall not see. In place of this unstable system whereby suspicions of currencies increase, there needs to be, if we are to have orderly world trade, some sort of a self-regulating system, working in the opposite way, so that when there is a distortion it is balanced by some form of corrective force.
As an illustration of this, I would point to the great dangers coming from countries such as Germany, which has an obsessive fear of inflation. Because of this, it is able to find itself with certain international economic advantages. I believe there is a general advantage to any country with an under-valued economy. If this is so, it is likely that all countries will try to find themselves in this position, and reduce their inflation as much as they can.
It is proper that countries should reduce their inflation within reason, but we know that there are much greater dangers to a country than moderate inflation year by year. These dangers are excessive deflation, an excessive cut-back in production, and excessive levels of unemployment. I do not see why a country which prefers to operate its economy on moderate inflation should be so much at a disadvantage compared with countries which are terrified of inflation and occupy positions similar to that of Germany. I do not see why one type of economy should be penalised because of another.
In any case, as we know, there are great political and other difficulties for many countries in a zero rate of inflation. These countries may be unable to reduce their inflation to the level of Germany, and so one will find inevitably a need to vary the exchange rate and to provide orderly variations in exchange rates.
977 I do not believe that the exercise of discipline which is being carried out by Germany is necessarily something that wants to be copied by other countries, or that other countries are able to copy that kind of control over their levels of inflation. Because of that, I believe that the most important international agreement for which we ought to be striving is to provide a scheme whereby we can obtain an orderly variation in the exchange rates. I do not think that it is easy—but neither were S.D.R.s—but this is probably the most important task.
§ Mr. J. Bruce-Gardyne (South Angus)
I find myself in agreement with a considerable amount of what was said by the hon. Member for Ashton-under-Lyne (Mr. Sheldon). This is not an unusual experience, because, in many of these debates, we have found that there is not a vast gap between the two sides of the House. There is only one matter on which I do not think the hon. Gentleman totally convinced me, and that was on the question of floating exchange rates.
I have tended to agree with the hon. Gentleman's attitude on that matter, but I feel that perhaps he dismissed a little lightly the experience which we underwent in the immediate pre-war years when we operated a floating exchange rate. I do not say that this proves that it can be done in modern circumstances, but it needs closer examination than the hon. Gentleman was prepared to give it.
I think that we are all grateful to the Financial Secretary for the way in which he introduced the debate and his lucid explanation of the Bill. There is, however, one matter on which I should like further elucidation, and that is on the question of reconstitution. I did not want to interrupt the hon. Gentleman again while he was speaking, but I hope that he will say something about this because it is an important aspect of the question under discussion.
As a number of my hon. Friends have said, the Bill has had an exceptionally lengthy gestation. I think that we can say that the conception really goes back to the late 1950s, and the time of the plans of Mr. Triffen and others. During its long pregnancy, the horoscope of the infant has undergone a certain change. In the early years it was said that we needed to create additional forms of 978 international credit to underpin the financial basis for the expansion of world trade. More recently, it has tended to be argued that we need these new forms of international credit to get away from the mystique of gold, indeed, to de-monitise gold. I am not suggesting that these two modifications are contradictory, they are not. But there is a certain distinction between them to which I shall return in a moment.
But, first, I think that we should look at the scope of our part of what is being proposed through the Bill. The Financial Secretary, understandably, was cautious about giving a figure for the scale of activation of S.D.R.s which may be envisaged. He quoted a figure, which we have seen quoted before, of between 1,000 million dollars and 5,000 million dollars over one five-year period. It is worth bearing in mind what this means in specific terms. Even on the most optimistic assumption, it would mean that the allocation which this country would receive would not really be much more than the equivalent of the outflow in one week's speculation against the £ following, say, an unfortunate strike settlement, or even, perhaps, an unwise Ministerial broadcast. That is the scale of what we are talking about.
Furthermore, I think that the Financial Secretary was rather optimistic in what he said about the timing of activation. The Group of Ten is committed to the proposition that there is no shortage of liquidity, and, therefore, there is no need for the creation of S.D.R.s while major reserve currencies, and, in particular, the United States are in deficit. I accept that, in practice, many people in the United States and, I think, the United States Government and the British Government as well, hope that the creation of S.D.R.s will antecede the elimination of the American deficit. The date given by the Financial Secretary of the spring of next year assumes that automatically.
I do not see any real likelihood that any of the Western European Governments or central banks would dream of permitting the activation of the S.D.R.s unless and until there had been a large diminution of the American deficit. By that I mean to a level below 2,000 million dollars per annum, and we will not see that this year. I question whether 979 we will see it next year. In other words, it is not as immediate as that.
There is another factor which must be borne in mind. I cannot forget that, when I was in Germany this spring I spoke to a fairly senior German official about the German attitude to the creation of S.D.R.s. I asked specifically whether the German Government would agree to the activation while the reserve currencies were in deficit, and, secondly, whether they would agree to activation of a five-year tranche or would want to do it year-by-year on a provisional basis. His reply was to ask a question: if the activation of S.D.R.s took place, could I assure him that the British Government would not use the counterpart of these credit facilities to finance their own internal deficit spending as they did last year?
We cannot brush that question aside. The implication is clear, that there are substantial doubts in many Continental quarters about the wisdom of an exercise of this nature unless and until some measure of proper confidence has been re-established in the British Government. It is no good our blinking this; it is a fact.
We should ask ourselves whether it matters that the activation of the S.D.R.s would not be created while the United States was in deficit. If the S.D.R.s are needed to take the place of American deficits in financing the expansion of world trade, then if the American deficit continues, does the delay in the creation of S.D.R.s matter? I cannot help feeling that there is a flaw in the logic somewhere, and it has to do with a point made by my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) in his interesting contribution, that, if I may put it in my own words, a currency is coveted to the extent of its rarity.
If the United States deficit were to be corrected or drastically reduced, one could envisage that the dollar would be so much in demand and so internationally respected once more that this fact would help to ensure that there was not the grave paucity of liquidity for reserves which people fear as a consequence of the reduction in the American deficit.
At this point one must scrutinise rather more closely than we are inclined to do 980 the argument that the world has already suffered from several years of liquidity starvation. It was about this point that the hon. Member for Ashton-under-Lyne had considerable reservations. If the consequences of a shortage of liquidity are liable to be excessive deflationary tendencies and stagnation in national economies, it is rather striking that the United States, after 10 solid years of swelling deficits, is currently experiencing the longest period of expansion in its modern history.
Equally, it is not striking that the one advanced industrial country which, in recent years, has experienced an actual and significant drop in its gross national product in a single year, is not a deficit country with a liquidity shortage straining upon it but the Federal Republic of Germany, which has the strongest liquidity position in the advanced industrial world today? This seems to suggest that the evidence for thinking that we have already been suffering from this sort of night starvation of liquidity is at best somewhat dubious.
What may be nearer the mark is to say that the forms of liquid liquidity on which we have been dependent and, in particular, the creation of ad hoc credits, swop systems, and the General Agreement to Borrow and so on, might be called "probationary credits." When the Financial Secretary said that the great distinction about S.D.R.s was that they were transferable, I would have thought that another great distinction was that they were not probationary credits in the sense that they do not assume a constant supervision of the economic management of the countries receiving them.
I am bound to say at this point, and I hope I do so in no party spirit, that it must be a fact that any creditor is liable to feel that he wants to keep a fairly close eye on the activities of a Government with the economic record of the present Government. We must recognise this and I do not think that it is necessarily undesirable, except in one sense: and that is that if because the credits granted are of a probationary nature a currency and a country's economic management are constantly under the microscope, there is a constant atmosphere of tension and anxiety in the monetary markets such as we have experienced in recent years.
981 From that point of view the attraction of S.D.R.s is that their use is not subject to continuous scrutiny in this form. Their disadvantage is that they can be activated only by agreement, and to a scale that is generally accepted. The great danger for the immediate future, it seems to me, is that the Americans' payment deficit will continue, and at some point in the fairly near future one of two things may happen. Either the Americans will apply drastic measures to put their balance of payments right —import controls, deflation and perhaps an effective embargo on imports—which will obviously lead to deflationary and protectionist pressure around the world, as the Financial Secretary said, obviously a very alarming and depressing situation. Or the Americans will extend the current embargo on gold sales to official transactions between central banks.
If the latter alternative happened, the rest of the world would be faced with an agonising choice. Either to acquiesce in the American decision, which would mean effectively being absorbed into the dollar trade system, with the amount of liquidity exclusively under the effective control of the U.S. Treasury, or it could opt for gold and allow its currencies to float upwards against the dollar. While some countries would do one and some countries would do the other, I fear that we would run with the dollar.
I suspect that other Europeans would go the other way, and would go into the gold bloc. And the effective consequence would be that there would be the most rigid and physical controls on trade between the dollar bloc and the gold bloc. We would be outside the gold bloc and might be excluded from participation in the European Community for a generation as a result, and swept into what might well become a form of industrial colonial dependency on the United States. Either alternative seems ominous in the extreme.
Frankly, like by right hon. Friend the Member for Stafford and Stone, I cannot see that there is any obvious way out of this except to change the price of gold. Special drawing rights are no way out because the scale of activation will not be adequate and the timing will not be quick enough, and there is the problem of getting total international agreement.
982 I do not want to delay the House by going into all the very fair objections to an increase in the price of gold which were advanced by my hon. and learned Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid)—
§ Mr. Bruce-Gardyne
I entirely accept that. He is my honourable and erudite friend. Certainly, the word "learned" applies in any but the Parliamentary sense.
My hon. and erudite Friend suggested that the essential beneficiaries of an increase in the price of gold would be those who held it and those who mined it. To spell it out, this normally means those international undesirables the Soviet Union, the Union of South Africa and France; the first two because they mine it and the last because she holds it. Of course, South Africa would be a beneficiary. The extent to which Russia would be a beneficiary depends on the extent of its unmined gold reserves, which is an enigma. I entirely agree with the hon. Member for Ashton-under-Lyne that it would be folly for us to reject a useful change—he has more reservations about it than I have-simply and solely because it would benefit countries like that.
It is much more doubtful whether France would benefit. The Bank of France regards a change in the price with considerable alarm because it knows that 5,000 million dollars worth of gold held in the bas de laine across France would come pouring out, and that the inflationary consequences would be alarming. The only country which would benefit entirely would be the United States, because it holds the largest quantity of gold in the world. There can be no dispute about that. Of course, one says that this would not solve the American balance of payments any more than devaluation solved the British balance of payments. But it would make the American balance of payments deficit much more tolerable for much longer, which is what the activation of S.D.R.s would not do.
But the best argument for a change in the price of gold is something additional to that. The purpose of an adequate supply of gold reserves as opposed to the sort of credit facilities which have 983 been built up in recent years, subject to the strictest scrutiny, is that it enables countries to pursue expansion and the creation of wealth. This is not a prime objective of life, although it seems to be a satisfactory objective for politicians. In conclusion, therefore, I should like to quote some words of Dr. Otto Emminger, the German central banker and former Chairman of the Ministerial Deputies of the Group of Ten. These words come from a book published in the spring, "Monetary Reform in the Price of Gold. Alternative Approaches", which was a report of a conference at Bologna last winter addressed by M. Rueff, Dr. Emminger, Professor Triffen and Dr. Bernstein.
Dr. Emminger made a violet attack and riposte on Professor Rueff for demanding an increase in the price of gold. He is a very strong critical witness for the prosecution. He said that a change in the price of gold, with the consequent effect on world reserves that this would have, wouldenable all countries to pursue much more expansionary policies than would otherwise be possible.I quoted this to the Chancellor last Tuesday at Question Time, when he said that he had not heard of it. I hope that the Chancellor will study it, because if one is, to use a ghastly phrase, a "growthman," one has to produce some sort of logical answer to Dr. Emminger's "anti-growth-man" case against a change in the price of gold. I hope that the Chancellor will study this comment. I agree with Dr. Emminger about his assessment of the consequences, but I do not agree with his assessment of the desirability of those consequences.
A change in the price of gold, moreover, would make it possible to achieve at the same time a change in the parity of the Deutschmark. While I believe that in recent years the relative accessibility of what I have called probationary credits has had one very desirable consequence in enabling the Prime Minister to pursue his fetishism about the £ parity for a year after the change should have been made, and thereby reduced the chances of its success, another serious conseqerice of the accessibility of probationary credit has been that it has enabled the Germans to resist for far too long a necessary and essential upward 984 adjustment in the parity of the Deutschmark, because it has enabled them to push out the surpluses that they have created through their internal policies and through the undervaluation of the Deutschmark. The creation of S.D.R.s would not lead to the necessary adjustment in the parity of the Deutschmark. On the contrary, I think they would make it easier for the Germans to hang on to their present parity. This is another argument against it.
For all these various reasons, I agree with my right hon. Friend the Member for Stafford and Stone that a change in the price of gold would be a much more constructive method of correcting the unsatisfactory nature of some aspects of the present monetary circuit. Compared with that, I regard the Bill we are discussing today as a shallow and shadowry irrelevancy.
§ 12.34 p.m.
§ Mr. A. H. Macdonald (Chislehurst)
I should like to give a fairly firm welcome to the proposals now before us. My welcome will be without the euphoria, whose absence from the debate was commented upon by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon). Indeed, I am slightly less enthusiastic today than I might have been at the beginning of the week. We now see the extraordinary action of the French authorities in imposing restraint on trade before they have been hurt which, as I see it, is in breach of their agreements.
It is possible that if this example is followed by other countries and there is a wave of protectionism, the measures before us will be unnecessary. I now see with painful clarity the reason for the remark in the text that there may be some five-year periods when there will be no allocations at all. Nevertheless, I feel disposed to give a firm welcome to these proposals.
I was a little sad, listening to the debate, to hear the several alternatives that have been canvassed by one speaker after another. The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) did well to remind us that this is no panacea. I am sure that the right hon. Gentleman was right when he spoke about the difficulties that arise from trade barriers and in thinking 985 that that is even more important than the problem of liquidity, with which we are attempting to deal. But I could not follow the right hon. Gentleman when he advocated his alternative proposal, namely, an increase in the price of gold. Surely, the arrival of supplies of gold upon the market must of necessity be irrational on account of the irrational way in which supplies are available.
Therefore, being irrational, I doubt whether any alteration in the price can be just or beneficial. Certainly, the right hon. Gentleman advocated an orderly readjustment in the price of gold. I suspect that if an adjustment of a substantial nature were made, its very substantialness and abruptness might be disadvantagous. However, if we had a modest little increase in the price of gold, that might encourage people to wait all the more eagerly for the next little increase. Therefore, I doubt whether this alternative is worthy of consideration.
My hon. Friend the Member for Ashton-under-Lyne commended a study of that speech to the House. With deep respect, it seems to me that the speech of the hon. and erudite—wherever that word came from—Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) was well thought out and should be commended to the House. I was glad to hear it, and I endorse the hon. Member's remarks criticising this alternative.
My hon. Friend the Member for Ashton-under-Lyne commented that it is now possible to obtain credit on far more extended terms than in the past. It may be that this is the solution and we should not be so worried about the problem of international liquidity. I am glad that credit is available on more extended terms. But there must be some limit to this process. After all, though banks are now more enthusiastic in finding out the credit-worthiness of customers in other countries and more capable of offering advice, there must be a limit to the process because, if one makes a mistake in the granting of extended credit, one can catch a nasty cold. I do not think that that is the complete answer.
The hon. Member for South Angus (Mr, Bruce-Gardyne), in what I found 986 to be an interesting and profitable speech, justly pointed out that we have not suffered particularly from a shortage of world liquidity. He justly pointed out that this was because there had been a substantial supply of American dollars. But he went on to offer a remarkable contention—I hope that I wrote it down accurately—when he said that the value of a currency depends on its rarity.
§ Mr. Bruce-Gardyne
I said, or intended to say, that the extent to which a currency is coveted depends on its rarity.
§ Mr. Macdonald
I am glad that the hon. Gentleman has made the position clear. Even if that were accepted—and I am not inclined to accept it—the question of world liquidity should not be primarily determined by the internal action of the several world authorities in endeavouring to correct their balance of payment deficits. This would make the creation of international liquid assets an arbitrary process.
Having heard the alternatives canvassed today, and remembering that they have been canvassed before, I give a definite welcome to the proposals for the S.D.R.s which we are considering. I am not sure that it is proper at this stage, if at all, to consider the detailed proposals in the Amendments to the Articles that are to be carried through because I note that the Amendments must be either accepted in their entirety or not at all.
As I read the text of the Articles, I gather from Article 26(5) that participants must pay their charges in S.D.R.s. In Article 26(7,c.i) it is stated that the managers of the Fund may or may not accept payments of charges in S.D.R.s. It is up to them to decide. There therefore seems to be a certain incompatibility between those two statements. If the participants must pay their charges in S.D.R.s, but the managers are not obliged to receive them in S.D.R.s, a nonsense could arise; but perhaps I have misunderstood the nature of the scheme.
I welcome the scheme because it makes for a deliberate rationality of the process. In the White Paper we are told that this is a deliberate attempt to 987 create liquidity, and I like the concept of being deliberate about this. After all, money is simply an artifact. It was a nonsense when we heard not long ago a foreign spokesman talking about the immutable privileges of gold. Gold is a metal which has no privileges. When dealing with a currency, which is an artifact, it is reasonable and rational to endeavour to control and adjust it so that it meets the needs of the world according to our intent and not according to some fortuitous chance. I therefore welcome the deliberation and rationality of this process.
We have been told that this is the creation of a form of money. The Financial Secretary endorsed that by his reference to paper gold. I suppose that these S.D.R.s are a form of money but, if they are, they are curious because this is a form of money that apparently bears interest. It seems that these things are not so much like a form of money but more like a kind of preference share. The S.D.R.s are a new device, but I felt somewhat uneasy when I saw this aspect of the scheme and wondered whether this is yet an added piece of strangeness that may detract a little from the acceptance of the sort of scheme that I would like to see.
The hon. Member for South Angus was right in referring to the relatively modest nature of the first allocation that will take place. But if there is to be a continuing expansion of world trade—
§ Mr. Harold Lever
Before my hon. Friend continues, it might be helpful if I say that when I referred to 1 billion dollars I was referring to each of the first five years. Nobody is suggesting that anything less than 1 billion to 2 billion dollars per annum in the first five years would be an appropriate start to this scheme. Some have been more optimistic in their expectations and have referred to a larger figure. I hope that my hon. Friend will be helped by knowing that I was referring to annual creations.
§ Mr. Macdonald
I am grateful for that intervention.
If the use of these S.D.R.s is to increase substantially—and I take it from that intervention that my hon. Friend hopes, as I do, that they will—then I 988 wonder if the creation of a new form of money will be assisted or retarded by the curious fact that this new form of money is apparently interest-bearing. I wonder how much this form of international currency will, as it develops, simply mean an enormous number of notional interest payments from one country to another, particularly in view of the average holding of 30 per cent. that countries are required to maintain. They will be paying interest to themselves This is an odd feature of the scheme which I otherwise heartily welcome. If there is a reason for it, it is not perceptible to me and I hope that the Financial Secretary will comment on the matter further.
§ 12.48 p.m.
§ Mr. Ronald Bell (Buckinghamshire, South)
I sometimes think that all the best debates take place on Fridays, and certainly this has been an interesting and useful one. I came to the House this morning intending to air my possibly familiar views on this subject, but not to do very much else. However, the speech of the Financial Secretary has stimulated me into positive opposition to the Bill—opposition which I did not possess on arriving here this morning.
My initial reaction to the Bill was that it would do no good and no harm. More dangerous, however, is the rôle in which the Financial Secretary seemed to cast it. In his peroration, when hon. Members sometimes loosen their grip on reality and relativity, he said that it was an example of the co-operation which has enabled us and other countries to finance the continuing growth of world trade. What has worried me and others in recent years has been the inability of the nations to finance the growth of world trade. That is the problem which, on the whole, we are now facing, and are now trying to solve.
The Financial Secretary described the Bill, in a phrase which I thought a little unfortunate, if only by association, as a giant stride forward. We all know who coined that phrase, or who last used it, and I hope that the hon. Gentleman is not associating himself with his right hon. Friend the Lord President of the Council, who spoke of a giant stride forward towards Socialist ideals—
§ Mr. Bell
Then shall we say that the Lord President took a giant stride forward with the expression, and made it his own.
I see this Bill as a triumph of politics over reality. Basically, it is a Bill to avoid raising the gold price, and the reason why this kind of operation is undertaken here, or in the United States or elsewhere is because of the obsession in the minds of the United States Administration over the years against doing something that might benefit Russia and South Africa—
§ Mr. Bell
And France, yes. My hon. Friend has reminded me that I should bring that remark up to date by including France, although ten years ago that was not in mind.
This is a very bad reason for not doing something which fundamentally would be beneficial to the flow of world trade. It must be manifest folly to peg the price of gold at its 1934 level. The hon. Member for, I think, Stoke-on-Trent, Central (Mr. Cant)—and, perhaps, also the hon. Member for Ashton-under-Lyne (Mr. Sheldon)—said that this was a superficial clash, that there had been no problem in financing the flow of world trade, but that the problem was one more of convertibility, although it has been formulated in different ways.
I suggest that the real problem—and the real function of gold—is with the central reserves, and it is with the reserves that I am concerned, to allow us to cushion the impact of the imbalance of trade upon the economy. A country can and ought to be able to run a deficit in its trade for a considerable period. It may very well be sensible and advantageous to do so. A country ought to be able to finance that out of its central reserves.
That is why I thought that the hon. Member for Ashton-under-Lyne was wrong in his choice of words when he said that, making all allowances for the good work of the United States, nevertheless we could now reasonably ask them to put their external balance in order. Their external 990 balance is in order. The deficit which they are running is one that they can easily meet out of accumulated capital resources, and it is a matter for the Americans themselves to decide at what stage they will do so. The United States are, in no financial sense, insolvent, or even in sight of insolvency. That is the function of central reserves.
Our problem is that our central reserves have been inadequate, so that we have had to embark on changes of policy almost as soon as we began to run into trade deficit, whereas we ought to have been able to phase our policies over a longer period. This problem has also been faced by most other countries. It is not currently faced by Germany, and perhaps not by France, but most countries outside the United States of America have been faced with this problem of having to adjust their policies prematurely by State intervention because of the inadequacy of their central reserves.
Very often when imbalances are corrected by State intervention, the result is to interfere with that country's economy, and with the policies of other nations whereas, if the matter were allowed to correct itself by a more automatic process, there would not be the accumulation of consequences that we have seen. It is in that context that I believe that a rise in the price of gold would have been highly beneficial to the world over the last ten years and that is why I am sure that it must come about now.
The Bill proposes special drawing rights. These are not positively evil. They might make some imaginable contribution, but the danger of the proposal as put forward by the Financial Secretary is that the drawing rights are being seen as a solution of the problems that countries are facing. The Financial Secretary must not complain if I see it so, because it was his words that made me see it so—
§ Mr. Bell
Well, a contribution, but a very modest contribution. I will not call it totally irrelevant, as it has been described already this morning, but it is certainly modest, and it is misleading if we conceive of it as anything but modest.
The danger appears to be that if we avoid raising the price of gold for various 991 doctrinaire reasons and try the system of increasing drawing rights on the International Monetary Fund, that system is subject to the "deliberate rationality" of which the hon. Member for Chislehurst (Mr. Macdonald) spoke. "Deliberate rationality" is a charming phrase, but what does it mean? It means the result of deliberate decisions by Governments or by governmental agencies—and that is the whole trouble. The value of gold is that it is a discipline imposed from outside, and the danger of drawing rights is that it is a system devised and controlled by Governments. It will not be long before Governments begin to use it for their purposes. Indeed, the Financial Secretary himself almost pointed the way when he said, "We must fashion a system to accommodate the rising expectations of the world."
That is what has gone wrong with the financial system since the war: Governments have used it, or sought to use it, to accommodate the rising expectations of the world. It is not the expectations of the world but the achievements of the world that the financial system ought to accommodate. The danger comes when we use it to accommodate the expectations; when we manipulate it— when, in fact, we cheat on the system in order to facilitate in the short run some social or political aspirations of particular Governments.
§ Mr. Macdonald
Is it the hon. and learned Gentleman's contention that human nature, or bankers or Governments will always be tempted to manipulate and that he thinks that this scheme can never work, or does he argue simply that it cannot work in the particular circumstances of the present time?
§ Mr. Bell
It will not work in the circumstances of the present time, nor for some way ahead. I recognise that one may reach a state in international and human affairs when one can trust Governments with the international control of the value of currencies. I am sure that we have not reached it yet, and that some external discipline, not under the control of Governments, must be exercised upon them from outside. This is not a novel point in the present context.
In 1954, speaking at Strasbourg, I described this situation as: 992… a jungle of selfishness, one nation trying, by financial juggling, to gain for itself an advantage in standards of living to which its industry and the value of its output do not entitle it.Using the phrase of the hon. Member, I went on:this is the belief that somehow, by skill and manipulation, one can offset any deficiencies in one's internal organisation as a manufacturing or productive country.That is the danger of Government advised and Government-controlled methods of currency organisation. The value I see in gold is the defect that I see in the S.D.R. scheme. Gold has an intrinsic value—we often under-estimate its value as a metal, it might be higher than it is were it free from all monetary influences, because platinum is much more expensive. There is also a special intrinsic value attached to gold throughout the world. Where one has gold as a major factor in currency reserves, there is a built-in weapon against the pliability of Governments. I saw in the Financial Times yesterday a letter about the S.D.R.s by a well-meaning person who said that we were losing an opportunity because the allocations were being tied to the Fund quotas. He said that we were missing an opportunity of helping underdeveloped countries, and we ought to break the connection between the Fund quotas and special drawing rights, so as to confer a remarkably striking benefit on the underdeveloped countries.
That is not being done in the Bill, but this illustrates quickly and well the sort of pressures that will be exercised on a system of this kind. It is one upon which we should be most reluctant to embark. I am happy to say that I advocated a revaluation of gold 14 years ago. It is remarkable how, if one keeps on saying the same things over about that period, one suddenly finds that a lot of people begin to say them, too—does the Financial Secretary wish to intervene?
§ Mr. Harold Lever
I was accepting the possibility that I will have the pleasure of hearing the hon. Gentleman in 14 years' time, making the same case.
§ Mr. Bell
I hope that the hon. Gentleman will be here to hear me making it. Certainly, if we have not done it by then, I shall be making it. It would not be 993 logical to advocate the revaluation of gold, to criticise the vulnerability of the S.D.R. system to pressure, unless I also advocated a fluctuating exchange rate, which I am sure is crucial to our present situation. The hon. Member for Ashton-under-Lyne and the hon. Member for Chislehurst pointed to difficulties in this.
We had it for eight years before the war, and it did not seem to do much harm. Those were eight years of growing production, declining unemployment and rising prosperity. From the depths of 1931, with a fluctuating exchange rate, we advanced steadily to the situation of 1939. We did not suffer the promotional disadvantages about which hon. Members spoke, because we had an exchange equalisation fund, which operated with remarkable skill and success. Large fluctuations did not occur. If in spite of the large equalisation fund, skilfully operated, large changes do occur it is because those changes are inevitable, and reflect something in the relative productive efficiency of the country.
It is quite hopeless to mask that. The reason why the Financial Secretary and some of his hon. Friends are willing to accept the S.D.R. system, the fixed exchange rate and the artificial value of gold, is because they are willing to accept a degree of Government intervention in the economy, that I am not willing to accept. The two are indissolubly linked. The hon. Gentleman frankly admitted it. One must have massive Government intervention and control in defence of a fixed exchange rate and an artificial price of gold. These cannot be divorced. If one is not willing to tolerate a massive and growing intervention by the State in the economic life of the country, one must find a self-regulating system. That can only be a fluctuating exchange rate. One cannot, in practice, have that now unless one revalues gold and, therefore, one has these clear oppositions to meet.
I cannot feel that the moderate inflation referred to by the hon. Member for Ashton-under-Lyne is something that we ought to tolerate. He said that it was wrong that a country with a moderate, continuing inflation, should be at a commercial disadvantage as compared with a country like Germany, which had managed to eliminate inflation. He suggested that one somehow overcomes this 994 disadvantage by deliberate Government action. One faces exactly the same dilemma again. It is wrong that we should have a continuing moderate inflation. I will not go into this, but give one reason which is a sufficiently compelling one why this is the case. We could never have low interest rates with a moderate inflation. The erosion of capital, which is characteristic of a continuing moderate inflation, makes high interest rates truly necessary.
High interest rates are one of the greatest impediments to orderly expansion of the economies of Western Europe. For those reasons, I find myself opposed to the Bill and very much disposed, if any other hon. Member agrees with me, to divide the House against it on Second Reading. This ought to be done because otherwise there goes out an impression of consensus about these matters, as though there were only one trend and all must follow it; as though the questions of gold price and free exchange rates were only the debating points of eccentrics; as though all orthodox opinion was solidly behind the move towards evermore pervasive Government control over the economy.
It was the policy of this side of the House a few years ago to move towards free exchange rates. It may be that some have changed their views. Mine have remained the same. Before deciding finally to divide the House, I shall listen to what my hon. Friend on the Front Bench has to say, and to what the Financial Secretary says, by leave of the House. But, subject to anything of an overwhelmingly persuasive nature, it will be my intention to divide the House against the Bill.
§ 1.10 p.m.
§ Sir Brandon Rhys Williams (Kensington, South)
It was not my intention to take part in the debate. I knew that it would be extremely interesting, and I looked forward to hearing a number of experts describing how the S.D.R. system would bring about a new state of affairs on the internatioal monetary scene. I knew that if I spoke myself, I would have to sound a jarring note, and I am encouraged to enter the debate only because, with the exception of the Financial Secretary himself, not one speaker has welcomed the Bill entirely and without reservation.
995 To me it has two major defects. First, it tends to prolong the status quo. Earlier this week I addressed a Question to the Chancellor of the Exchequer about the two-tier gold market and inquired what the Government were doing to encourage the movement to flexibility of rates, following the successful setting up of the two-tier gold market. I was discouraged and disappointed to hear him praising the Bretton Woods Agreement and the system of fixed exchange rates and the immutable gold price which went with this agreement. He took the view that since the war we had seen an unparalleled advance of prosperity and world trade, which may well be true, but do not we in this country know all too well how much more could have been achieved if we had not constantly been under the necessity to have high Bank rates and controls and Government interference with a view to defending this system of fixed exchange rates which went with the Bretton Woods Agreement?
The system of fixed exchange rates cannot be permanent. It is an artificial concept and sooner or later it is bound to be pulled down by political forces. The great economies of the world are not run exclusively by bankers or by the monetary authorities. Political forces have to be taken into account. It is true that in the United States of America price stability was achieved by democratic choice for a number of years. The Americans feared inflation so much that they said that they would have a high rate of unemployment rather than continually rising prices, and between about 1958 and about 1964, or 1965, the domestic price level in the United States was more or less stable.
Rightly or wrongly, in this country we said that a high rate of unemployment was socially intolerable and that we should therefore make it our priority to ensure that there was full employment. I do not consider this to have been wrong, but what went along with it was a degree of inflation because we have not yet reached the point where we can achieve full employment without some degree of inflation I hope we shall and I am sure we can. but we have not yet done so.
If the management of sterling permitted a degree of inflation for political reasons and the management of the dollar permitted a relatively high rate of unemploy- 996 ment to obtain stability, there was no choice but that the two great economies should drift gradually apart. This was an operation of political forces and it was fruitless for bankers or monetary authorities to declare that the £ and the dollar were immutably fixed in terms of each other, because the peoples of these great economies willed it to be otherwise. However much exhortation they might have had, they were not prepared to run the countries in such a way that there was an immutable exchange rate between the £ and the dollar.
There is another reason why fixed exchange rates are bound in the end to break down. It is possible that if the exchanges took account merely of current transactions, exchange equalisation accounts and co-operation between central bankers would make it possible to hold exchange rates stable at fixed rates; but it is not possible to cater for the enormous and sudden capital movements which are also pushed across the exchanges and which are becoming an increasingly alarming feature of the international scene. In the last fortnight or month, there has been an immensely rapid drain of capital out of France, with the result that we now hear talk of French devaluation. A few weeks ago, it would have been thought virtually inconceivable that the French would be brought to the point of having seriously to consider devaluation; but political upheaval has caused a capital flow, and so the franc is no longer a strong currency.
Looking at the newspapers in any financial centre of the world one can see virtually every day speculation about the stability of one or other of the major currencies, and all too long there has been speculation that the £ was not secure and, in spite of last year's devaluation, that speculation unfortunately still continues. We hear that the Deutschmark may be valued upwards. We hear all sorts of predictions and prognostications about the future of the so-called fixed exchange rates.
In fact, they are not fixed. When the Chancellor told me that he was not in favour of any departure from the degree of flexibility which was permitted in exchange transactions, he forgot that only a few months ago we proved that a margin of nearly 15 per cent. in exchange rates was permitted. But if we have not 997 achieved fixed exchange rates and cannot do so, I accept the strictures of the hon. Member for Ashton-under-Lyne when he says that floating exchange rates are not practicable either. But I do so with the reservation that by "floating" he means wildly fluctuating exchange rates, without any element of stability brought into the market by the operations of Governments and central banks. Obviously, one could not look to one's newspaper every morning to find out what had happened to the £ without having the slightest idea of how it would be standing as a result of some speculative movement.
If there is to be flexibility in exchange rates, it must be an orderly form of flexibility, with a high rate of activity, with buyers and sellers operating against each other as in the gilt-edged market in the Stock Exchange, where enormous transactions may take place during the course of the day, although at the end of the day the change may be not more than half a crown. I should like a wider use of the phrase "managed rates", because in the present state of civilisation, certainly in the Western economies, it is possible to conceive of a system of managed rates which would be fair and lasting.
These managed rates would take account of market forces, the supply and demand for currencies, arising particularly from current transactions. If this country continues to adopt a policy of full employment without solving the problem of inflation, the market will have to be managed in such a way that account is taken of the fact that the value of the £ is steadily falling. The exchange markets must also take account of political forces. If there is a sudden upheaval, as there has been in France, what should take the strain is the exchange rate. If it does, the hysterical capital movements will not take place, because the market will have adjusted itself to the new state of affairs and there will be far greater stability than there is now when we have a fixed exchange rate in which no one believes.
With the present degree of confidence between central banks, between Governments and between operators in foreign exchange markets, it would be perfectly possible, given a degree of international consensus, to arrive at an orderly man- 998 aged rate system, and this would be an enormous boon to the world. We are already on the way to it, consciously or unconsciously. In London there is an orderly market in dollar premiums for securities. It is a somewhat artificial concept, but it works well enough. The supply and demand balance out, so that there is a relatively stable, and I say only a relatively stable, premium. People know what rate they have to pay if they wish to invest in dollar securities.
It could be said that one of the best managed markets of all is the gilt-edged market. I suppose one could conceive of a system in which the Government insisted that all Government stocks should automatically stand at par, with the Government always ready to intervene in the market to ensure that they did. Hon. Members will, I think, agree that that is a fantastic and far-fetched concept. In retrospect, however, I think that the concept of fixed international exchange rates will be seen as just as far-fetched and remote from reality as the idea of a gilt-edged market constantly held at par.
Something which was not welcomed very much at the time but which history might well welcome was the setting up of the two-tier gold market. It seems anomalous to have gold quoted at two different prices according to the type of transaction which one wishes to undertake, but the City of London must surely take tremendous credit for the fact that this operation has got off the ground extremely successfully. We now have the two-tier gold market with a relative degree of stability and a fairly high rate of transactions between the world's great currencies and gold.
It seems to me that what we should hope for is not that that experiment will be brought to a close after a few months, as is widely anticipated in the Press, but that in time the old gold market at fixed rates will diminish to the point where no transactions take place at fixed rates. Then, consciously or unconsciously, we shall have arrived at the point when we have flexibility and the operation of market forces is allowed to take effect.
Possibly, that might be the simplest way of raising the price of gold, simply by allowing it to rise. If any foreign government—I am thinking obviously of the United States—has commitments 999 which make it all too difficult, or if it is unable to face Congress in an election year with the prospect of a formal increase in the price of gold, we can let the market look after that and let the fixed price of gold simply become a dead letter.
As to sterling and the management of sterling, whatever system is adopted, whether S.D.R.s are brought in or the amount rationed out to countries by the International Monetary Fund is vastly increased, it seems to me to be inevitable that our policy for sterling first and foremost must be to avoid inflation.
That brings me to the second major objection to the Bill. The existence of these Special Drawing Rights appears to me to be bound to be inflationary in a world context because it permits consumption to continue without any increase in real wealth. It permits countries which should be exerting greater discipline over their foreign spending to carry on as they have been doing, causing more inflation all the time. If our objective in this country is to bring the inflationary effect operating on sterling to an end, we should not support an international move which will add to world inflationary pressures.
Whatever the future for the £ as a reserve currency, if we wish it to be a respected unit in the world and willingly retained, we must make the £ into a store of value, because that is what money ought to be. When people look at the £ and wonder what it will be worth the following day and think that in the following year it is bound to be worth several per cent. less than it is now, the £ is failing to be a store of value. If, however, we can give people confidence, as the Swiss did for a very long time, that the currency will hold its value and that if they choose to exercise the rights to consume which ownership of a currency gives—not now, not the following year, but, perhaps, in 10 years' time—if there were confidence that during that lapse of time one would suffer no loss and no erosion of value through inflation, the £ would be in universal demand, because in this fleeting world of ours anything which will hold its value is bound to be treasured.
If we could convince the world that we were finding a solution to the problem of inflation, the £ would be enormously in demand. Indeed, I hope that 1000 we make it our target that Britain should become a capital haven. Much of the French economic miracle achieved under President de Gaulle has been achieved because of the repatriation of French capital which had flown from the Republic because of the instability of the franc. I am sure that a great deal of our difficulty is due to the fact that sterling has flown from this country because London is no longer regarded as a place where money is stable and will retain its value.
I am opposed to the Bill because I think that we shall solve nothing by creating a new form of currency the simple objective of which is to protract the unsatisfactory status quo. The existence of S.D.R.s will only accentuate present trends, which have been proved to be so adverse to our economy since the war. If we could concentrate on defeating inflation and making that our primary objective, we would be much nearer to solving our problems than by adopting rather gimmicky solutions of this kind. In other words, if we will only look after the prices, the £ will look after itself.
§ 1.26 p.m.
§ Mr. Michael Alison (Barkston Ash)
I listened with great attention to my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams). I do not go all the way with him in wholly disapproving of the Bill, which proposes the setting up of S.D.R.s, although I have much sympathy with what he said about the sense in which this could be construed as yet another device for getting us off the hook, enabling us to go on living above our means and living, as it were, on tick.
Perhaps my hon. Friend underestimated the extent to which there may in the future be a genuine need for liquidity in the world to increase, but genuinely as a counterpart to an increase in world trade and not merely as a device for getting debtor nations off the hook. That is one reason why I would not want wholly to reject the Bill.
There are some rather intriguing possibilities in the concept of what the Financial Secretary referred to as the S.D.R.s being a kind of paper gold because, while this subject is, perhaps, too complicated to be analysed at great length, I see possible scope in the concept of paper gold 1001 for getting the best of both worlds in the way of an increase in the price of gold.
Most hon. Members, on both sides, seem to feel that one of the unavoidable ways of increasing international liquidity is, somehow, to find a means of increasing the price of gold while, at the same time, not handing too much of a bonus to those who, for quite accidental reasons, have greater resources of it than others. It seems to me, however, that if the S.D.R. is a kind of paper gold it is not unlike the old £1 note. In days gone by, the £1 note was meant to be paper gold. There was a time when one could exchange one's Bank of England note for its face value in gold and it was genuinely a paper gold. Interestingly enough, however, the Bank of England £1 note which at one time could be described as paper gold has succeeded in expanding its currency value—the extent to which it can be used to finance a given amount of economic activity—without any increase in the gold base.
It might be that the way to increase the quantity of gold in the world, if that is necessary in the long run, is to allow S.D.R.s to become genuinely paper gold like the old English bank note, with a great deal more scope to operate on a gold base.
§ Mr. Ronald Bell
Does not my hon. Friend agree that as the scope of the banknote has increased its value has declined?
§ Mr. Alison
I appreciate that, but it is still a valid point that the banknote, although it has certainly declined in value, has done so in the context of an enormously increased volume of industrial, commercial and economic activity and a substantial increase in the overall standard of living of the people of the country as a whole.
That, however, was a slightly theoretical digression and whilst giving a conditional welcome to the Bill, I want to address myself to what my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) described as the precision instrument. It is, perhaps, too wide a distinction that he suggested to regard this, on the one hand, as a precision instrument and, on the other hand, the need with which we are confronted 1002 of something of monumental skill, to which this is not entirely and immediately irrelevant. I think that we have got to look at the nuts and bolts of it rather carefully, and in the few minutes I have to speak I just want to try to look at the nuts and bolts of it and try to work out some of its implications.
I want to draw the Financial Secretary's attention particularly to paragraph 4 of the Explanatory and Financial Memorandum. Under the heading "Financial Effects of the Bill" we see in that paragraph that the Government allege that the S.D.R. proposals offer two quite tempting prospectuses, two particular attractions. In the first place, the S.D.R. are alleged to be third line assets in the Exchange Equalisation Account in addition to gold and foreign currency the Equalisation Account holds. It is also alleged that the attraction about this is that we acquire this third line of assets, S.D.R., without any corresponding outflow from the E.E.A. to acquire it.
I would point out, first of all—I am sure the hon. Gentleman is aware of it— that the Exchange Equalisation Account is quite capable at present of acquiring foreign currency, without a corresponding outflow of sterling. The hon. Gentleman knows, I am sure, and the House probably knows, that, under the I.M.F. arrangements, if we want to acquire some foreign currency for the Equalisation Account we have in the first instance to make an outlay to the I.M.F. of the foreign exchange concerned, and then the I.M.F. immediately returns to the Exchange Equalisation Account, in exchange for that, what are called interest-free loans. So under the existing arrangements, before the S.D.R. comes into operation at all, it is possible to have one of the alleged advantages of the S.D.R., namely, acquisition of foreign exchange without any corresponding outflow of sterling because the interest-free note device already provides for this.
Let us beware that we are not being tempted to accept something which is already in existence. It is already possible for the E.E.A. to acquire foreign exchange without a corresponding outflow of sterling, because it can come from the I.M.F. Though the S.D.R. can unquestionably be described, as the hon. Gentleman in the Memorandum described it, as a third line of assets, I think that 1003 one has at this point to be rather careful about strings attached to it.
This is the second point I want to make, because it seems to me that the proposals we are now faced with for acquiring this advantageous third line of assets indicate a quite dramatic change in the relationship which will exist in the future, from the hitherto more or less complete, autonomous control the Government have had over the E.E.A. to the new development which this Bill introduces—unquestionably, the I.M.F. hand in the till. The acquisition of this third line of assets, although very desirable in itself, no doubt, will bring the I.M.F. far more into the Equalisation Account than has hitherto been the case.
This, of course, as the Financial Secretary is well aware, arises from the reconstitution provisions of the new S.D.R. proposals, and I hope that we shall get some quite clear, explicit reassurance from the Financial Secretary about these reconstitution provisions, because this seems to me to be a very new and severe inhibition on the full control which the Government have had hitherto over the Exchange Equalisation Account.
If we are designated it is rather as if one named oneself in this House. If we are designated, currency from the Exchange Equalisation Account has to flow out in exactly the same way as an hon. Member who is named has to withdraw from the Chamber. If we are designated at a certain point by the I.M.F. this explicitly means it has acquired special drawing rights in exchange for currency—I want to say a word about the currency—whether we like it or not; there has to be a withdrawal; and because we have signed the undertaking there has to be a deliberate release of funds, which would not otherwise necessarily have taken place from the Exchange Equalisation Account.
I accept that there is, inherently, in the very operation of the Equalisation Account, a certain degree of loss of sovereignty. If we have a fixed interest rate and we are under an obligation to support the value of sterling we have at a certain point to buy sterling in the foreign exchange market, which means, involuntarily perhaps, selling foreign exchange to acquire sterling. To that extent, we are already inhibited, we already lose some 1004 sovereignty, by having an Exchange Equalisation Account, but I would like the hon. Gentleman to conceive this position which I believe is a new one and likely to arise as a result of the scheme we are being asked to accept.
Suppose in year one of the five, before this scheme operates, or years one and two, there is a very heavy use by the United Kingdom of these S.D.R., used by the Government to acquire foreign exchange in order to meet some serious balance of payments position, thereby incurring what I think is technically called a heavy reconstitution obligation or position. Suppose this happens in year one, and correspondingly, also in year one or year two, the Bank of England finds itself under an obligation to buy very large quantities of sterling in the foreign exchange market in exchange for foreign exchange in order to support the value of sterling. Both these things are inherently likely to occur in a situation where there is a balance of payments difficulty. We are likely to dip into our S.D.R. and incur a heavy reconstitution position. We are also likely to be buying sterling in the foreign exchange market to keep its value up. The net effect of these twin operations will be that the Exchange Equalisation Account, by the last year, or year three or year four, is extremely flush with sterling and there is not much foreign currency in it. If that happens our reconstitution position is imposed upon us, and we are under the obligation, as a result of designation from the I.M.F., to take in the whole lot of S.D.R. to reconstitute our position in exchange for currency, and the currency at this point flows out of the Equalisation Account to reconstitute the position. The only thing we have in the E.E.A. in large quantities at this stage, because we have been supporting sterling, is a lot of sterling. Is this accepted in exchange for S.D.R?
I can hardly believe the world outside is at this point likely to be prepared to allow sterling to be exchanged for S.D.R., which we have to do to reconstitute our position, because this is merely, in international terms, countervailing action to the original action taken to support the value of sterling.
§ Mr. Hugh Fraser
My hon. Friend is absolutely right on this, but surely this is the point raised in the penultimate 1005 paragraph of the Bank of England's report today. The whole question of imbalance cannot be righted by the S.D.R. system. This is the point, that it really cannot apply to a major currency deficit. This is where we are limited.
§ Mr. Alison
I shall look forward to hearing the Financial Secretary's exposition of this, but, nevertheless, it is from the Equalisation Account that currency must flow to reconstitute the S.D.R. position; and if the Account is full of sterling and not of foreign currency then our problem is exacerbated, because at this point we can only reconstitute our position by a further drawing upon minimal foreign exchange reserves.
After all, it is only foreign exchange currency which is available for the settlement of international debts for goods and services. S.D.R.s cannot be used to pay off the Canadians for corn or wheat imports, or the Persians for oil imports, and so on. The position can well arise, where S.D.R.s are being used to buy foreign currency, and sterling is being bought in support operations by the authorities, each action designed to help in the balance of payments, yet where the reconstitution provisions began to bite, they could genuinely exacerbate our foreign exchange situation. We must have reassurance on this.
I cannot see that S.D.R.s will do anything for us if they simply mean a further postponement in the decision to hold back our consumption, as the alternative to getting deeper into the toils of debt. This will not help at all. It will make the pay-off more expensive and more difficult for us.
Will the Financial Secretary give not only his reassurance about the reconstitution position, but also about the condition written into the terms of agreement so far that S.D.R.s cannot be used for purposes of changing the composition of reserves. This is a very important safeguard. In theory, the countries that are given an allocation of S.D.R.s cannot sell them or dispose of them to participating countries simply in order to get dollars in exchange for reserve purposes. When the reconstitution period comes, instead of redisposing of the dollars, they might dispose of some other currency, for example a currency which they no longer wish to hold.
1006 I am delighted that such a possibility has been excluded, at least in theory, by the terms of the Bill. But I hope that the Financial Secretary agrees that the parts of Clause 25 which seek to restrict this possible abuse of the system, are extremely lightly and vaguely drawn. I can see very little likelihood that there will be effective measures available in this instrument to prevent countries who want to change the composition of their reserves actually using S.D.R.s to do so. If one studies the terms carefully, one sees that the only penalty is the "after the horse has bolted" penalty. The door is closed to the use of S.D.R.s for a period, but this is too late to penalise countries who use S.D.R.s to change the composition of their reserves.
I can see other difficulties arising. Countries in the sterling area such as Australia, for example, who may get into balance of payments difficulties could well be an additional embarrassment to us. What happens to a country like Australia which may get into balance of payments difficulties and is therefore entitled to use S.D.R.s to help it to acquire foreign currency to settle its compensatory payments? It will use the S.D.R.s to acquire dollars to pay off its debts, but what happens when the time comes for reconstitution?
What currency does it use? Surely, it will then further dip into the foreign exchange reserves of the sterling area as a whole, and the original inhibition which exists in the sterling area against any excess of balance of payments deficits, will tend to be weakened by the S.D.R. provisions, which give a soft option in the first instance and a difficult pay-off at a later period.
I am inclined to feel that the Financial Secretary has over-played the shortage of liquidity argument in the context of world trade. I am not persuaded by this, and an increasing number of observers, particularly in the United States, are inclined to favour the theory which I am much more inclined to believe in myself, that in fact there is not really a great shortage of international liquidity for world trade purposes, and that where people intend to trade they will find the wherewithal, in exactly the same way as people who intend to invest in this country will find 1007 the cash to do so. They will mobilise all sorts of reserves. Where there is a will to trade, trade will take place. At the same time, I can see that there may well be circumstances in which there will have to be a much more gradual increase in world liquidity as world trade expands.
I hope that the Financial Secretary will use this instrument, to which I give my qualified support, as a medium for assisting world trade and not a further device for getting us off the hook and landing us in deeper troubles in the days to come.
§ 1.45 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
I believe that this is one of the best and most interesting debates on a financial subject to which it has been my pleasure and privilege to listen. We have had, if I may say so with all humility, a series of extremely well informed and interesting, if at times controversial, speeches which I have found both educative and informative. Whatever our differences, I am sure we would all agree that we are today discussing what must be one of the most esoteric and recondite branches of finance which it falls to this House to have to consider. I hasten at once to disclaim any special knowledge. Unlike most of those who have already spoken in the debate, I am neither a banker nor an economist, and I therefore approach the subject with hesitation, and, I reiterate, with humility. I take comfort in the view put to me the other day by a banker when he said that when the House discussed this matter he felt that there were always only two people in the House who understood what they were talking about, the only two who had at that time chaired the Group of Ten. Having heard today's debate, I think he would change his view. We have had deployed a remarkable body of expertise.
I would at the outset thank the Financial Secretary for the kind remarks which he made about my right hon. Friend the Member for Barnet (Mr. Maudling). I shall have something to say generally about the merits of the case we are considering, but no one could deny that my right hon. Friend, at a time when matters were at a very early stage, pursued the search for a more rational form 1008 of international finance, for improvements in the machinery of the international monetary system, with great vigour, and played a notable part in bringing to fruition the arrangements which we are discussing today. I would in turn reiterate the view which has been expressed by my right hon. Friends that the former Chancellor, the present Home Secretary, in his period as Chairman of the Group Ten, also played a notable part in this.
The debate has shown a very interesting dichotomy of view, which perhaps is not altogether unexpected in view of the philosophical differences with which individuals approach problems of this sort. I can say at the outset, speaking from the Dispatch Box, that we give a general welcome to the Bill. The House will remember that in the Budget debate on the opening of the second day my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said:It is good to hear that there may be a Bill in this Session. It will be one of the few Bills which I shall welcome."—[OFFICIAL REPORT, 20th March, 1968; Vol. 761, c. 432.]I am here to give the Bill this welcome on behalf of my right hon. Friend.
I am bound to go on to say, however, and here I am echoing a point made by a number of my hon. Friends, that the Financial Secretary appeared to me to claim altogether too much for the Bill. His reference, I think it is an unhappy reference, to "giant strides" seems to have been an extravagant use of language. Whatever view one may take about this development in the international monetary system, it does not deserve that sort of exaggerated eulogy.
A number of my hon. and right hon. Friends who have sounded in different degrees a note of caution—indeed, there were notes of caution sounded from behind the Financial Secretary—seemed to me to be acting entirely properly. When we examine a matter of this sort, it is right that we should note carefully the limitations which the scheme that we are considering has within it. Nevertheless, the Bill represents the outcome of five or more years of painstaking international negotiation and represents a small but significant step along the road to international monetary co-operation.
Of course, it is small, and many hon. Members have mentioned this already. I 1009 shall be quoting one or two more figures in the course of my speech. Relative to any other form of reserve which the trading nations of the world are accustomed to deploy, whatever the levels in the first five years, it is bound to be extremely small. But it is significant, because it is the first move towards a system which carries the eventual possibility, looking many years ahead, of freeing the world trading system from a dependence on gold and national reserve currencies.
The gold exchange standard has served the world very well. The Bretton Woods Agreement was a notable milestone. In that connection, I listened to my hon. and learned Friend the Member for Buckinghamshire, South (Mr. Ronald Bell) with great interest. He sought to argue that, if we had not had Bretton Woods and if the world monetary system had had to develop without that Agreement and the measure of order which it brought, we should all be very much better off. I am bound to say that I cannot agree with him.
At the same time, it is right to point out that the system was set up in 1945 and, though it has not reached the end of the road, it is at any rate now showing its limitations. It is unable to match the sustained and accelerating growth in world trade which has been such a marked feature of the international scene now for a number of years.
There has been a tendency to argue that, in relation to the increase in world trade, the S.D.R. scheme is so small that it is of no value at all and, for that reason, is a delusion, and that, if we support the Bill, we shall be voting for a delusion or, as my hon. Friend the Member for Oswestry (Mr. Biffen) said the other day, a flight from economic reality.
That is not right. It is small, but it is a step in the right direction. The Financial Secretary has said that we do not know what the amounts will be in the first five years. Supposing, for example, it is somewhere between 5 billion and 10 billion dollars in the first five years. That would mean, in each year, that something between 1 billion and 2 billion dollars would be allocated to the members of he fund who did not opt out, as they are entitled to under the scheme. 1010 Supposing that it was 2,000 million dollars which was to be allocated. Our share of that would be about 230 million dollars per annum. No one has sought to controvert the figures given the other day by my right hon. Friend the Member for Bexley (Mr. Heath) that our external debt has increased in the last 3½ years by something of the order of £3,000 million, which is the sombre equivalent of something over 7,000 million dollars. It is obvious that S.D.R.s to a value of 230 million dollars a year will make no dent in that. It is just over 3 per cent. However, just because it is small, I am sure that one is wrong to draw the conclusion that, therefore, it is valueless. To my mind, it is a starting point and one which, for that reason, we must welcome.
The second objection which might be made is that the whole process is moving too slowly. It has taken a long time to negotiate so far, and the Financial Secretary told us in his opening speech of the procedures which still have to be followed before the scheme can be activated, the hurdles which have to be overcome, the majorities which have to be secured, and the ratifications which have to be achieved. But, slow though it may be, his hope that this would come into force with the first S.D.R.s being allocated in 1969 seems a very optimistic one. There are few commentators on the subject who would be prepared to go along with that. However, though it may be too small and too slow, nevertheless it is significant.
I may be asked why I consider it to be a significant advance. My first reason is that it is a remarkable milestone in terms of international monetary co-operation. We have had the nations of the world faced with an admitted danger, faced with the threat in the last year or two of a complete breakdown in the system which would, at best, lead to a strangling of world trade and, at worst, to a complete breakdown of the whole system. They have agreed to sink considerable differences in a determination to achieve a common objective. The measure of this is that, despite the disagreement of one of the important members of the Group of Ten at the Stockholm meeting last month, the position has now been reached, as I understand it, that continued refusal by France alone to ratify or go along with this scheme cannot now 1011 prevent its adoption and its eventual activation. I hope that the Financial Secretary can confirm that that is so. If the whole Common Market decided to opt out, that would prevent the scheme coming into existence. If it is only France, it cannot. This is a notable achievement and something in which those, who have been concerned can take some pride.
§ Mr. Bruce-Gardyne
I detect that my hon. Friend may conceivably be confusing agreement to ratify the scheme with agreement to activiate it. It is clear that the others are most unlikely to refuse to ratify it, but activating it is a different proposition.
§ Mr. Jenkin
I would not suggest that all members who ratified it would agree to activating it. Those are two separate hurdles. If I gave the impression that I was underestimating the hurdles, I hasten to correct it. Nevertheless, the position has been reached that the one nation which has consistently opposed any of these advances in international cooperation is no longer in a position by herself to frustrate it.
The second reason why it is significant is simply the reaction which the Stockholm Convention has had in international circles. The degree of stability which it at once introduced and the welcome that it achieved—
§ Mr. Jenkin
If one studies the Press reports following the Stockholm Convention and the communiqué which was issued, there was an immediate easing of pressure on reserve currencies, and a narrowing of the margin on gold. Of course, it has not lasted. Other pressures have come up, and we are in a stormy period. But the mere fact of agreement on S.D.R.s improved matters and, I believe, will continue to do so.
There cannot be any doubt that it was widely welcomed, though with differing degrees of optimism, some of which was reflected in the over-optimism of the Financial Secretary. Some of the most realistic institutions gave a cautious welcome to it.
In its anual report, the Board of Management of the European Monetary Agreement, on 8th June—and I quote from the Financial Times of that date— 1012 sought to inject a sense of urgency. It stated:The report draws particular attention to the need for the implementation of the I.M.F. Special Drawing Rights Scheme, if individual countries are to build up their monetary reserves without producing a corresponding deterioration in the net reserves of other countries.The E.M.A. welcomed the scheme. My right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) referred to the annual report of the Bank for International Settlements which was more cautious. At its annual meeting it referred to the special drawing rights asan effective addition to international liquidity.It is right to note that the report went on to point to the limitations and difficulties which still remain to be overcome and to emphasise—and I emphasise it, too—that this is no substitute for individual countries getting their own economic situations right and correcting their own balance of payments deficits. Nevertheless, the Bank for International Settlements welcomed this asan effective addition to international liquidity.Therefore, the advent of the new scheme has been of considerable psychological benefit to the growth of stability on the international scene.
The third reason why I argue that this is a significant advance is that it represents, in terms of the method adopted, a wholly new departure: a new form of liquidity, an attempt to supplement existing forms of liquidity in gold and foreign exchange with something which is at once more rational and less arbitrary than those with which we have built up trade over the last two decades.
One must comment here on the view —and I have seen the phrase quoted in the Press—that these special drawing rights are to be described as "fools' money". I do not believe that this is right.
Alan Day, writing in the Observer on 31st March, said:The debate about gold and the future of the international monetary system is ostensibly a matter of economics—but at a more fundamental level it is also largely a matter of psychology and politics.Possibly there are differences—indeed, we have had echoes of it today—which 1013 echo the disputes of the 19th century in this country between what one might call the currency school and the trade school—those who argued, on the one hand, that the prime requirement was that there should always be a gold backing for any currency and those who argued, on the other hand, that gold was essentially the servant of trade and that it was essential that one's currency institutions should be devised to help trade. In the end, although the currency school held sway for a long time in this country, the trade school won and we now have our sophisticated systems of finance.
One is bound to ask: what would have happened to our internal trade if we had continued to have gold essentially as the only means of exchange? Wealth is in the last resort created by trade. The values of goods are increased by being manufactured, transported and traded and money, in the last resort, is the means of exchange. One has to decide which is to be master. I believe we are right when we say that is the interests of trade that we have to make paramount and we must ensure that our institutions, the framework of mutual obligations, which one creates, the wide acceptability of the means of exchange which we devise, are aimed at increasing trade.
If we tie ourselves to gold, are we not tying ourselves to a pretty primitive means of exchange—something that depends upon the labour of man digging it out of the ground, humping it round the world and storing it in places of safety? It is an expensive laborious and crude system. How much better that one should have a more sophisticated and more rational system based on paper, provided that we can make it acceptable and can inspire the same confidence which gold has inspired.
One or two hon. Members in the debate today have echoed the fundamentalist views of General de Gaulle, who described gold, as is well known, as immutable, universal and impartial. Those adjectives may well be right, but they are not exclusive. One should add that it is irrational, haphazard and emotional. One only has to examine the events of the last six to nine months to see the truth of that.
One could not, with a scheme of this sort, aim to supplant gold or to usurp 1014 the existing means of reserve. That, if it takes place at all, is many, many years ahead. Certainly we are not today envisaging the demonetisation of gold. It would be impossible for any scheme of paper currency, which this scheme creates, to begin to carry this strain. These are the wilder dreams of the incurable optimists who always seem to hover around. Sober bankers and others have been firm in stamping hard on any such ideas. Mr. Alfred Hayes, the President of the Federal Reserve Bank of New York, speaking to the Swiss-American Society in Basle, said thatcutting the dollar loose from gold would probably lead quickly to a chaotic system of floating rates in which all the trade and credit operations would be severely handicapped and in which each country might feel forced to engage in competitive restrictions on trade and payments.
§ Mr. Jenkin
My right hon. Friend says that it might happen. Indeed, it might. These are the dangers facing us. But let us not add to them by listening to those wild spirits, to whom I referred, who say that the demonetisation of gold is just around the corner. Giant strides do not seem to be too far away from that point of view.
Despite all its shortcomings, the use of gold will continue to be inevitable for many years ahead. This was made clear by the Bank for International Settlements in its annual report, which stated:as gold still has the advantages of universal acceptability and of intrinsic value "—here I echo the remarks of my hon. and learned Friend the Member for Bucking-shire, South—and the dollar the advantages of flexibility and of earning interest, it would not seem prudent to discount prematurely the future rôle of these well-tried reserve instruments.To that I would certainly echo "Hear, hear".
A number of my hon. Friends during the debate have reiterated the argument that a much better solution to the problems confronting the world international monetary system would be to double the price of gold. My right hon. Friend the Member for Stafford and Stone, my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) and my hon. and learned Friend the Member for Buckinghamshire, South, put this point of view 1015 with varying degrees of emphasis. Bearing in mind that gold has been pegged at the same value of 35 dollars an ounce since 1934, there is much logic in that argument, but I feel bound to say that in the present instance I do not regard this as a practicable solution upon which we should pin our hopes. We are facing an immediate problem. If we were to go on beating away at the suggestion that we should persuade the Americans to revalue gold, I believe that we would achieve nothing.
I refer here to my own experience of talking to many American bankers. In the course of the last two or three months I have spent five weeks in the United States doing almost nothing but talking to American bankers. I have come away profoundly convinced that it is a firm political and psychological fact that the Americans will not do that. There is a firmly held conviction that to revalue gold at this juncture would be tantamount to a surrender. These are not public utterances of politicians which must be taken at their appropriate value. These are the privately expressed opinions of bankers.
The second reason why it would be wrong to pin one's faith on this is that the consequence would be irrational. My hon. and learned Friend the Member for Buckinghamshire, South seemed to suggest that allowing the market to operate in gold as it operates in other commodities is more rational than trying to develop systems along the lines that we are discussing today I am a firm believer in a market economy, but I cannot see the logic of that. The distribution of gold in the earth is one of the most irrational facts that one can imagine from which to start. It appears that almost all the gold is in South Africa and in Russia. For that reason it is hardly surprising—except in recent months—that the two foremost protagonists who have argued that gold should be revalued are the South Africans and the Russians.
§ Mr. Ronald Bell
Does my hon. Friend agree that the natural distribution of nickel, aluminium and other metals is equally irrational—if one can apply the word "rational" to such a divine matter —yet a natural market operates for them?
§ Mr. Jenkin
Mercifully, we do not use aluminium, nickel, beryllium, and other metals as currency. We use gold, because for centuries it has acquired many of the characteristics of currency, and has built up for itself a reputation, or, to use my hon. and learned Friend's own words, an intrinsic value, which has served the world well, but which is increasingly ceasing to do so on its own, and what we are seeking to do here is to supplement it.
I invite hon. Members to read the statement at the annual general meeting of the Chamber of Mines of South Africa by the President, Mr. Tom Reekie, which was published as a full page advertisement in the Financial Times. He made a sophisticated and well argued attempt to debunk the whole concept of S.D.R.s and called instead for a revaluation of gold. I shall forbear from the temptation to read his speech, but he persists in fostering the illusion that S.D.R.s are no more than a form of credit. It is important to recognise that this is not just credit. These are created assets of a new kind, and to refer to them as credit is to misunderstand them.
Russia makes no secret of her desire that gold should be revalued. The Guardian the other day reported:Mr. Vinogradov … today blamed the United States for holding down the price of gold and made it clear that Russia wanted a price increase. He told the Economic Commission for Europe that retention of the present price played a major rôle in aggravating the international monetary crisis.If Russia was a country which placed faith in a market economy, one might give more weight to that, but one can only regard it as a mixture of mischief-making and self-interest.
§ Mr. Cant
I appreciate that the hon. Gentleman is having trouble with his Left-wing element below the Gangway, but can he, in the interests of international monetary order, get some of his hon. Friends who believe in the rôle of gold to ask the Russians to plan their sales of gold to the Western hemisphere, and not to be so sporadic about it?
§ Mr. Jenkin
With respect, I believe that some of that contains an element of mischief-making as well. There is not as much difference on this side of the House as the hon. Gentleman is trying to see. It is a difference of emphasis, 1017 and I hope that I am not seeking to show anything else.
§ Mr. Hugh Fraser
My hon. Friend has not dealt with the real problem which faces us today, which is the question of the growing inconvertibility of reserve currencies. This is the main point, and neither Front Bench has grappled with it.
§ Mr. Jenkin
I take the point made by my right hon. Friend. I listened with great interest and complete agreement to what he said about this. Reserve currencies have become increasingly inconvertible because the countries which manage the reserve currencies have for too long persisted in major balance of payments deficits. So long as countries are in deficit, nobody will trust their currencies as a vehicle for their own reserves. This will, therefore, inevitably result in the increase in inconvertibility of those countries. I said this at the beginning of my speech, but I am happy to accept my right hon. Friend's invitation and say it again, that one cannot regard these S.D.R.s as in any way the substitute for us and the United States in particular putting our own economies straight and correcting what appear to be long-standing balance of payments deficits.
Those who seek to argue that somehow this system is going to be a substitute for that are deluding themselves, and, more dangerous, are deceiving their hearers, because this must not be allowed to happen. I hope that the Financial Secretary will accept the invitation of my hon. Friend the Member for Barkston Ash (Mr. Alison) and reiterate in language as firm as he can command that the Government accept this point of view.
My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) also put his finger firmly on one of the objections from this country's point of view to seeking a solution in the revaluation of gold, and that is that it would not be in our interests to do so. The share of our reserves now held in the form of gold is probably less than half what it was three years ago. We have run major deficits for the last three years. Whereas the advantage might have been marked three years ago, it can be very slender now.
Further, under the Articles of the I.M.F. Charter, many of our debts to 1018 the I.M.F., and probably all of them, are expressed in terms of gold. One of the results of an increase in the value of gold could be to increase our indebtedness, and we could therefore be even worse off as a result of revaluation.
§ Mr. Biggs-Davison
Is my hon. Friend arguing that it is inopportune, even dangerous, at this time to change the gold price, or that the gold price should never be changed? It seems to me that if, without any pressure due to international financial crises, the price of gold had been altered in the past so that it reached a more realistic level, the recent international financial crisis would never have arisen.
§ Mr. Jenkin
The last part of my hon. Friend's statement may well be true, and with the benefit of hindsight it is a perfectly respectable point of view to hold. I know that one of the most dangerous words a politician can use in this House is "never", but I should never commit myself to the proposition that we shall never see any change in the value of gold. What I am saying is that I do not believe it is a practical solution to the problem which we face, and I could not support that view. I do not think that my hon. Friends have sought to put it forward that one can scoff at the S.D.R. scheme because it would be better to double the value of gold.
There is further a practical argument against this which none of my hon. Friends who champion the cause of revaluing gold have sought to put before the House. It is that the very process of doing so would be bound to be highly disruptive. The matter would have to go through Congress. The President no longer has it in his power to revalue gold by a Presidential decision. It would require an Act of Congress. One has only to look at the recent taxation Act to realise that there would be months and months of uncertainty leading to speculation which would have a catastrophic effect in the present state of the international monetary markets. Conceivably, it could be achieved if we were in a period of equilibrium and stability, although even then it would be difficult enough; but in the present circumstances any attempt to do this would be disastrous. I have the utmost sympathy with the American view that they should refuse to do 1019 this and I therefore reject the revaluation of gold as a practical solution to our problems now.
I return, therefore, to the valuable but limited scheme which we are considering. It is right to acknowledge its limitations and shortcomings. In the first place— here I take up the point, although not necessarily fully agreeing with it, made by my hon. and learned Friend the Member for Buckinghamshire, South —as the scheme is at present devised, it does not play any notable part in increasing the flow of trade with underdeveloped countries. It is not geared to that. I specifically avoid the word "aid", because, if the increase in world liquidity is to help under developed countries, it will be by increasing their trade and the benefits which Maxwell Stamp, the protagonist of the Stamp Plan, saw—that making the greater share of S.D.R.s available to under developed countries would increase their trading ability and therefore world trade as a whole.
This has not happened. S.D.R.s will be allocated strictly according to quotas. One must accept this as being what the parties to the Agreement, the members of the I.M.F., could agree on, but I hope that it is not the last word, because one is far more likely to increase standards of living in the under developed countries by increasing their ability to trade than by pouring out sums of money on aid, much of which is too often misused—
§ Mr. Ronald Bell
I should hate it to go on record, wrongly, that I was pressing for the drawing rights to be unrelated to the Fund quotas. Quite the contrary; I mentioned this as pointing to a risk of political pressures being brought on the system to distort it and make it subject to the social policies of all the member countries.
§ Mr. Jenkin
I take the point. What I find interesting is to compare what my hon. and learned Friend was saying— I am in no sense contrasting it—with the suggestion, for instance, the other day by the noble Lord, Lord Cromer, who was calling, as I understood it, for an international panel of highly respected bankers who would somehow operate as a watchdog against irresponsible Governments which ran deficit financing for too 1020 long and operated to the detriment of the international system. In so far as he was asking for something else, this was not realistic and I would disagree, but the fact that the I.M.F. is there may well be an advantage, and surely it could be in our interests and those of world stability—we depend more than any other country on trade—that something of this sort might and could operate through the I.M.F.
But I come once again to the important point made by my hon. Friend the Member for Barkston Ash: that is, that this scheme cannot be used for reconstituting our existing liabilities. Here, one thinks particularly in terms of the sterling balances. Apart from the fact that the S.D.R.s are not big enough, this is contrary to the intention of the scheme, which is to finance world trade. Therefore, we must look for other means to this. We should be grateful if the Financial Secretary could tell us anything about the talks which he has recently been having in Bonn, and perhaps elsewhere, with a view to funding —that is probably not the right word— some part, what I believe has been referred to as the "sensitive part", of the sterling balances to remove that element of the pressures which we can be under in the event of a weakness in the £.
Clearly, this cannot now be done through the I.M.F. The I.M.F., having provided our 1,400 million dollars and now the 745 million dollars to the French, cannot undertake this at present, but nevertheless it would still be desirable. There have been comments in the Press, and I hope that the hon. Gentleman will say something about that.
Despite all the shortcomings—and they are many, as many of my hon. Friends have mentioned—and limitations, I endorse what was said of the scheme in the communique after the Agreement, that, although it…will not provide a solution to all international monetary problems, it will make a very substantial contribution to strengthening the monetary system.I believe this to be right and that, although pessimism is rife in the world at the moment and over-optimism is dangerous, there are grounds here for cautious optimism.
What, after all, have we had? 1967 saw the Kennedy Agreement, 1968 has 1021 seen the acceptance by the I.M.F. of the Special Drawing Rights Agreement. These are, by any standards, major milestones in the expansion of world trade. In the last resort, our prosperity and the growth of the prosperity of the world, depends on trade. I echo the words of Emerson:The greatest meliorator of the world is selfish, huckstering trade.Because the Bill is a small but significant step towards this end, we wish it a fair wind.
§ 2.26 p.m.
§ Mr. Harold Lever
With the leave of the House, I should like to reply to the factual interrogations and then to the argumentative ones. The first point is on the system of reconstitution of these drawing rights. This is a highly technical subject, on which I could spend more time than I have for my whole reply. It is based on the understanding that people who run down their drawing rights are obliged to reconstitute them to a certain level within a given time. That reconstitution is, in fact, a discipline which prevents these drawing rights being used as a sort of automatic support for profligacy.
Very elaborate rules are already provided. It is suggested that they are sketchy, but there are not permanently established; we will see where we get to and we will adapt the rules, I hope, by international agreement, to ensure that they provide the appropriate disciplines, which are, of course, very different from the disciplines which the hon. Member for Barkston Ash (Mr. Alison) mentioned, of the I.M.F. interest-free notes which we get when we issue sterling notes.
It is true that we acquire foreign currency by means of sterling notes from the I.M.F. at present, but this is different. Those notes must be bought back within given periods; there is no such obligation here.
When one has one's drawing rights, unless one runs them down, one has no obligation to acquire any, other than quite voluntarily under the scheme. But the designation of a country to acquire drawing rights is done by the I.M.F. which, of course, does it having regard to two points. The first is the balance of payments position of the person desig- 1022 nated—i.e., he becomes suitable; one does not designate someone who simply has not any foreign currency to pay for drawing rights. Second, that designation takes into account a country which is obligated, by reason of its drawing rights position—because it has used up some of the rights—to reconstitute them.
In other words, if the scheme works properly and honestly, the people who will be designated are those who are due to draw back by bank these notes to reconstitute their holding in accordance with the scheme, and who will have made the proper provisions to enable themselves to do so.
§ Mr. Alison
Could the hon. Gentleman explain, in the context of reacquiring S.D.R.s to reconstitute the position, what currency has to be laid out to reacquire them? In redeeming the interest-free notes to the I.M.F., in the earlier instance which the hon. Gentleman gave, one has to do so with foreign currency and cannot do so with sterling. Does one have to reconstitute the S.D.R.s with foreign currency, or can it be done with sterling?
§ Mr. Lever
It would have to be in the currency required. Obviously, no one would accept sterling in the example which the hon. Gentleman gave. It would be for the Fund to designate the appropriate currency in which the reconstitution was to take place, according to the particular person who was designated to reconstitute and the person from whom he was hoping to acquire the special drawing right asset.
The scheme will work, therefore, differently from the I.M.F. borrowings. If one reconstitutes one's holdings, or does not run them down, one will not be subjected to an obligation to provide foreign currency. This is a net addition to world liquidity, whereas such borrowings are not.
My hon. Friend the Member for Chislehurst (Mr. Macdonald) raised the question of interest rates. He appeared to be confusing the interest payment due to the I.M.F. with ordinary transactions, nothing to do with S.D.R.—for example, ordinary borrowings and drawings from the I.M.F. These interest charges can be paid by S.D.R. in certain circumstances, which enlarges the value of the S.D.R.
1023 The interest position of S.D.R. is more technical and complicated, and I will try to summarise it. [HON. MEMBERS "Oh."] I gather that there are some hon. Members who would prefer that I did not do so. I will content myself by saying that the net interest position is not disadvantageous. I will take the hint and not go into the matter in detail now, but I will readily explain it to my hon. Friend on another occasion.
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) is entirely right in saying that if the French opposed the activation of the scheme—and we hope that they will not—their vote alone would not be sufficient to prevent its activation. In those circumstances, the French, if they wished, could opt out and, subject to the appropriate activity by the Governments, they could opt back into the scheme if they wished. If more than 15 per cent. of the Fund members object, the activation cannot take place. The whole point about activation is that it would take place in circumstances suitable for it and in amounts required at the time of activation.
I entirely accept the hon. Member's view that these drawing rights are not intended to enable us to Fund or otherwise to pay off our sterling balances. He asked about discussions at Bonn, Basle and elsewhere. As has been noted in the Press, there appear to have been some discussions at Basle and elsewhere with a view to stabilising the future of certain volatile margins of sterling holdings, and international action was said to be taking place which would have a helpful effect on that.
I cannot go into the point in detail, but I would say that I do not accept that any of these discussions could accurately be described as funding discussions or discussions in any way liable to affect prejudicially the rights of sterling holders because funding would imply turning a short-term claim into a long-term claim. One is not in a position to negotiate, behind the backs of people who have these sterling assets, anything which would in the smallest degree prejudice any of their rights.
§ Mr. Patrick Jenkin
Although I used the word "funding", 1 immediately qualified it by saying that it was not the right word. I unhesitatingly accept 1024 what the Financial Secretary said. I understand that what is being sought is something in the nature of a standby which would give some protection to this country in the event of unexpected withdrawals of sterling balances—the "sensitive fifth", as it has been described. That is the point about which I was seeking information, and if I used the word "funding", it was with that in mind. It was a terminological inexactitude.
§ Mr, Lever
I am glad to hear that. I have happy identity with so many "of the hon. Member's views that I am glad to find that here, too, we are in agreement.
I come to the final point of fact. I was asked about the under-developed countries. Obviously, the main benefit to under-developed countries will arise from the general improvement in the world reserve situation, but they themselves will benefit not insignificantly by valuable additions to their own reserves if the scheme gets underway. What we might do in the future is a matter for the Fund and of the Governments concerned, but all sorts of possibilities exist, if the world thought it appropriate, for developing the system as the way in which we ensure that the whole world participates in assisting under-developed countries rather than the somewhat haphazard way in which it is arranged at present, by which the burden falls most heavily on the more immediately willing.
§ Mr. Cranley Onslow (Woking)
Is there not likely to be a tendency on the part of many under-developed countries to exhaust their reserves, since that makes them eligible for this assistance? Is there any check on the way in which they can exhaust the additional reserves which this Bill may provide for them?
§ Mr. Lever
There is a check in the sense that they have undertaken certain obligations to reconstitute, which act as an adequate check.
I should make it clear that the basis of the implementation of any international monetary arrangement, whether the I.M.F. or inter-country aid, in the 20th century must necessarily be the good faith and honourable intentions of the parties concerned. The I.M.F. do not possess and is unlikely to acquire any gunboat to exact compliance by its members with their undertakings.
1025 May I deal, briefly, with the central argument? Hon. Members twitted me with reading from a Treasury brief when I made my opening speech. I should tell the House that it will never be given any views from me which are not my own. I shall not read Treasury or other briefs. I may read my own briefs sometimes in the hope of setting down surely, accurately and in the most concise form what I feel that I ought to tell hon. Members, but any special pleadings which hon. Members might hear from me will be my own views—
§ Mr. Lever
As long as I have the privilege of being a member of the Government, it would be wrong for me to express anything more than the marginal shadings of differences of opinion which may appropriately exist within a Government on any subject. If I felt myself unable to be loyal to the Government, I should not be standing at the Dispatch Box.
§ Mr. Lever
Yes, Mr. Speaker.
Some hon. Members questioned my description of the Bill as a giant stride forward. They said that it is irrelevant to the major problems which face us which, they say, are the inconvertibility of reserve currencies and the question of the doubling or multiplying of the price of gold. It seems to me odd that those who advocate a doubling of the price of gold are the very hon. Members who speak of the irrelevance of a proposal designed to increase world liquidity.
The main effect of a doubling of the price of gold would be to increase world reserves and liquidity in a spectacular, unorganised and often irrelevant way. I cannot understand why those who advocate a doubling of the reserve value of gold in this spectacular way should complain that the modest, reasonable, carefully-planned increase in world liquidity which is embodied in this scheme is irrelevant to our situation.
Surely it is exceedingly relevant to have a planned, organised increase in 1026 reserves, an increase occurring at the points at which it is helpful to world trade and to world stability, in contrast to the spectacular, unplanned and excessive increase in world reserves which would result from a doubling in the price of gold.
The position of these critics seems odd and contradictory. The right hon. Member for Stafford and Stone (Mr. Hugh Fraser), to whose words on these matters we always listen with extreme attention, tried to get rid of the dilemma, which he recognised, by saying, "What we need is an orderly, agreed increase in the price of gold". But that is begging the whole question, because the advocates of the scheme for raising the price of gold claim that its advantage is its impartiality in the face of Governments. It represents, they say, market forces.
But the hon. Member seeks to give some sanity to the proposal by adding, "Let us not increase the price of gold in the rocketing, haphazard, irrelevant way which might occur if we left it to the blind forces of the market. Let us do it by international agreement among Governments". If we have moved to a point at which Governments and central banks can reach useful constructive and cooperative agreement, as I believe we have, then surely it would be better to adopt such a scheme as this, embodying a rational basis, to give stability and to avoid the irrelevances of an increase in the price of gold.
Several hon. Members thought that I had claimed too much for the scheme. It is not for the scheme itself but for the underlying approach and for its success that I claim so much. For the first time in world history we are seeking, by this scheme, to bring into being a consciously planned, internationally agreed reserve asset tailored to the needs of the modern world.
In the past, we were either short of liquidity or we depended on the deficits of the sterling and dollar areas. At a time when we see that the sterling and dollar area deficits can no longer be relied upon safely to provide this liquidity, we are replacing these deficits with an appropriate alternative. It is useless, indeed dangerous, to cry for immediate 1027 abolition of the sterling and dollar deficits, which have provided the very satisfactory liquidity about which hon. Members have spoken, if one is not to put something in its place.
This is precisely why I regard this as a giant step forward—that mankind is for once, in advance of the danger, preparing an alternative to the sterling and dollar deficits as a provision for world liquidity. It is for this reason that I wel-
|Division No. 256.]||AYES||[2.42 p.m.|
|Albu, Austen||Johnson, Carol (Lewisham, S.)||Rankin, John|
|Anderson, Donald||Johnson, James (K'ston-on-Hull W.)||Rees, Merlyn|
|Barnes, Michael||Judd, Frank||Richard, Ivor|
|Beaney, Alan||Lawson, George||Robinson, W. O. J (Walth'stow, E.)|
|Boston, Terence||Lee, John (Reading)||Roebuck, Roy|
|Bottomley, Rt. Hn. Arthur||Lever, Harold (Cheetham)||Ryan, John|
|Boyden, James||Luard, Evan||Sheldon, Robert|
|Brown, R. W. (Shoreditch & F'bury)||Lubbock, Eric||Silkin, Rt. Hn. John (Deptford)|
|Cant, R. B.||MacColl, James||Silkin, Hn. S. C. (Dulwich)|
|Dunwoody, Mrs. Cwyneth (Exeter)||Macdonald, A. H.||Swingler, Stephen|
|Ellis, John||Maclennan, Robert||Thorpe, Rt. Hn. Jeremy|
|English, Michael||McNamara, J. Kevin||Wainwright, Richard (Colne Valley)|
|Evans, loan L. (Birm'h'm, Yardley)||Marquand, David||Weitzman, David|
|Fletcher, Raymond (likeston)||Mellish, Rt. Hn. Robert||Winnick, David|
|Fowler, Gerry||Millan, Bruce|
|Freeeon, Reginald||Molloy, William||TELLERS FOR THE AYES:|
|Goodhart, Philip||Oram, Albert E.||Mr. Joseph Harper and|
|Gregory, Arnold||Parker, John (Dagenham)||Mr. Charles Grey.|
|Herbison, Rt. Hn. Margaret||Prentice, Rt. Hn. R. E.|
|Onslow, Cranley||TELLERS FOR THE NOES:|
|Rhys Williams, Sir Brandon||Mr. Ronald Bell and|
|Mr. John Biggs-Davison.|
§ Bill accordingly read a Second Time.
§ Bill committed to a Committee of the whole House.—[Mr. Harper.]
§ Committee to meet upon Monday next.