§ Question proposed, That the Clause stand part of the Bill.
§ 11.28 a.m.
§ Mr. Emrys Hughes (South Ayrshire)
I should like more information about the sums to be spent from the Civil Contingencies Fund. What is a civil contingency? For example, is the expenditure of £200,000 on the proposed investiture of the Prince of Wales a civil contingency, and, if so, am I justified in supporting that expenditure?
I am interested in the reduction of public expenditure. I believe that the Chancellor of the Exchequer has been perfectly justified in demanding that we scrutinise every item of public expenditure because of the serious financial state of the country. Therefore, if I am asked to approve of a Civil Contingencies Fund which includes the money for the investiture of the Prince of Wales, this is the time and opportunity to object, because I do not believe that that can be described as a civil contingency. At a time when we are engaged in reducing public expenditure on school meals, school milk, and innumerable other—
§ The Chairman
Order. The hon. Gentleman can ask quite properly for an explanation, but he cannot go into detail, because money approved under the Clause will have to be approved under Votes presented to the House. He will then be able to examine them in great detail, but not now.
§ Mr. Hughes
Then may I have an assurance from my right hon. Friend that the £200,000, which I think to be a grossly unjustified expenditure at present, is included in this Civil Contingencies Fund. If so, am not I entitled to oppose it?
§ The Chief Secretary to the Treasury (Mr. John Diamond)
The short answer 772 to my hon. Friend is that the proposal in the Clause does not affect a single Estimate, except, perhaps, to the extent that it would postpone it. If any payment were made out of the Civil Contingencies Fund in advance of its coming before the House on an Estimate, that payment might be considered a little later by the House than if it had first come on an Estimate. I am glad to say that the nature of the amount and its purpose are not for consideration this morning.
§ Mr. Hughes
I should like an assurance that this sum is not to be included. It is quite reasonable—
§ The Chairman
Order. I cannot allow the hon. Gentleman to pursue this line. He will have an opportunity on the Vote to discuss whether that should be carried. We are now concerned only with the total sum.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.
§ Clauses 2 to 4 ordered to stand part of the Bill.
§ Bill reported, without Amendment.
§ 11.33 a.m.
§ Mr. Diamond
I beg to move, That the Bill be now read the Third time.
Not many points have arisen since we had the Second Reading, and therefore it may be more convenient if I listen to what hon. Members have to say and do my best to reply at the end, if I am privileged to catch your eye again, Mr. Speaker.
§ 11.34 a.m.
§ Mr. Michael Alison (Barkston Ash)
I am very grateful to the Chief Secretary for taking that line. There are one or two things we want to talk about, although he gave the Bill a very good airing last Friday, and several of my hon. Friends will have points to pursue.
There is one provision in particular that I want to invite the Chief Secretary to think about again, or at least to reassure us about. I refer to the provision in Clause 3 under which the Industrial Reorganisation Corporation is empowered to diversify its borrowing sources, particularly to enter the Eurocurrency market. In his Second Reading speech the Chief Secretary spoke with some enthusiasm about that provision 773 and more especially about the Eurocurrency market, of which he said that it:…is helpful to the City and the country. We want to encourage that market…"—[OFFICIAL REPORT, 8th November, 1968; Vol. 772, c. 1242.]I question that approach. The Eurocurrency market, into which the Government will encourage the I.R.C. to dip its ladle under Clause 3, deals principally in United States dollars, which are deposited in banks outside the United States, most of those banks being in Europe, The British banks, as the right hon. Gentleman pointed out, have the lion's share of this market.
It is necessary to consider the circumstances in which these expatriate funds are drawn to London, and conversely—and more important—the circumstances in which they might fly hotfoot from London. On the possibility of flight from London in particular I have some modest doubts about the provisions in Clause 3.
These expatriate funds come to London for two reasons. The first relates to the margin between borrowing and lending in London as compared with New York, for example. In general, London banks pay one more for deposits and charge less for loans than New York banks. Hence it pays one to come to London whether one is a borrower or a lender. Now this is where the rub comes, under the provisions of Clause 3. U.S. dollars which come to London and enter the Eurodollar market are not switched into sterling, and thus made available to the Chief Secretary and the I.R.C., unless the holders can have some assurance that there will not in the meanwhile be a fluctuation in the exchange rate and consequently a possibility of their suffering loss.
§ Mr. Speaker
Order, I shall not interrupt the hon. Gentleman again, but this would have been more appropriate on the Question, That the Clause stand part of the Bill.
§ Mr. Alison
I apologise, Mr. Speaker. I thought that it was for the convenience of the House that we should cover this matter in its wider aspect on Third Reading, and I shall be very brief.
§ Mr. Alison
Thank you, Mr. Speaker.
The risks that attaches to Eurodollars when switched into sterling means that they will nearly all be covered forward in the forward exchange market. The point about the London market is that the margin between borrowing and lending is sufficiently wide to enable them to bear the cost of covering themselves forward. Therefore, Eurodollars used by the I.R.C., for example, after being switched into sterling will nearly all have involved a collateral forward sale of sterling in the forward exchange market. This gives rise to the peculiar situation, described by Mr. A. T. K. Grant in his book "The Machinery of Finance", that:Eurodollars thus become the equivalent of foreign owned sterling with an exchange guarantee.The guarantee arises because of the nature of the forward exchange market. But that market is only what it is because the Bank of England, acting for the right hon. Gentleman, is committed in practice to supporting it. In a world edgy about sterling, the Chief Secretary cannot allow the forward exchange market to stand at too great a discount as far as sterling is concerned, so he must inevitably support it. That means that Eurodollars which flow into London for purposes such as he provides for in Clause 3, for the use of the Industrial Reorganisation Corporation, for example, and which are naturally covered forward, may actually generate an outflow of official reserves in support of the forward exchange market, thereby causing an additional strain on the central reserves.
Is not this rather an Alice in Wonderland sequence for the Chief Secretary to be promoting in a Treasury Bill? By encouraging the use of Eurodollars he may be necessitating the support of the forward market with official funds. Incidentally, the facility which will be encouraged under the Clause—the use of Eurodollars drawn to London—proves to be more advantageous to holders of Eurodollars than to official holders of sterling. The exchange guarantee to which I referred, which is inherent in the forward exchange market, is more advantageous than the provisions made by the Government under the Basle facility, where holders of sterling do not have 775 the same complete guarantee as is available for Eurodollar holders in the forward exchange market. This seems rather bizarre to say the least.
The burden on the reserves in supporting sterling forward in the forward exchange market is already appreciable, and I myself doubt the wisdom of providing this facility for a Government agency, or shall I say a semi-official agency, the Industrial Reorganisation Corporation, which may well have the effect of increasing the strain on the central reserves.
But the burden of supporting the forward exchange market is as nothing compared with the situation which would arise if there were a sharp, volatile movement of Eurodollars away from London. I believe the reserves are quite inadequate to contemplate a major flight of Eurodollars from London with any sort of equanimity at all.
The Government have thus to pay the price of keeping Eurodollars in the London market, and that is, to keep the internal exchange rates very high. This is a form of bondage. Does the right hon. Gentleman seriously want to promote, under this Bill, measures which will increase this bondage by having to continue to keep interest rates very high in order to obviate the possibility of a switch of Eurodollars? He knows that the rate today in Paris for domestic money is 9 per cent. This is the sort of rate which may tend to increase the bidding up of internal exchange rates in the different centres.
Anything which in present circumstances encourages Eurodollars to come to London, and particularly such encouragement by a Government agency, must in some measure be suspect. I would remind the right hon. Gentleman that the scale of funds in Eurodollars is really substantial, something like 800 million United States dollars net liability for the United Kingdom. It may well be more. I should also remind him that France, Germany, Switzerland, to name only three European countries, actually prohibit the use by domestic users, official or private, of expatriate funds in this way by prohibiting payment of interest on foreign-owned time deposits.
I do not want to rule out the possibility that the right hon. Gentleman is 776 beginning a wise course here, but I want him to reassure us very firmly that the encouragement through this Bill of a semi-official body to promote an influx of Eurodollars into London, switching into sterling, thereby necessitating their forward cover, is really in the best interests of the country at the present time, particularly of our reserves.
§ Mr. Speaker
May I say that what I was pointing out just now was that it is more convenient to the House that, if there are objections to a Clause in a Bill, the objections are expressed when the Clause is being debated.
§ 11.42 a.m.
§ Mr. Charles Fletcher-Cooke (Darwen)
I, too, would like to take up Clause 3. As I read it, I do not think it restricts the Industrial Reorganisation Corporation to the Eurodollar market, important though that is. As it is drafted, the I.R.C., can get its funds incurrencies other than sterling, whether temporarily or otherwise than by temporary loan, whether by the issue of securities or otherwisethough no doubt it does that with an eye on the Eurodollar market. It empowers the I.R.C. to borrow or raise money by way of loan or equity anywhere, as I understand it, in the world.
The Chief Secretary made an astonishing claim for this on Second Reading when he said:The borrowing of non-sterling currency can only strengthen the nation's reserves…."—[OFFICIAL REPORT, 8th November, 1968; Vol. 772, c. 1227.]Let us carry that to its logical conclusion. The more we borrow the stronger our reserves become. Is that right? Does the Chief Secretary really uphold that doctrine? Certainly it looks as though it is being pursued, because in the last four years we have borrowed over £3,000 million worth. If the Government think this is strengthening the reserves, why do they not borrow considerably more? It is really a rather remarkable doctrine that the more we borrow of non-sterling currency the better our reserves are. This cannot be right, and I do not think it is right that the Chief Secretary should continue on record with this extraordinary statement.
It is necessary, I know, that we should borrow from abroad, because our rate of capital formation in this country is 777 now so lamentable, and the right hon. Gentleman is quite right when he says that private business and some of the nationalised industries either can or are obliged to borrow non-sterling currencies because there are simply not funds by way of capital formation available here. Owing to the policy of the right hon. Gentleman's Department, with its massive weight of taxation, and owing to the insatiable demands of the nationalised industries, the rate of capital formation is very low. By reason of that it is necessary to go to other countries to try to borrow some of the capital which they have formed. For that reason it is sometimes cheaper to do that, but that is nothing to encourage or to be proud of, as the Chief Secretary, in his speech on Second Reading, seemed to think. That is a confession of the failure of our financial system to produce the funds here by the savings we need.
I would not, in these lamentable circumstances in which we are living, deny the Industrial Reorganisation Corporation the same cover as have the other concerns which were mentioned, but to say that this is a cause of rejoicing, that the borrowing of non-sterling currencies can only strengthen the reserves, and to adopt the philosophy of Dr. Pangloss, as the Chief Secretary did on Second Reading—that somehow this is a great blow for freedom and this is a great strengthening of the British financial position—is really to stand finance on its head.
§ Mr. Diamond
Would the hon. and learned Gentleman tell me where I made the statement that this is a great blow for freedom?
§ Mr. Fletcher-Cooke
I cannot quote the ipsissima verba on that by any means, but any fair reading of the right hon. Gentleman's speech is that it is of tremendous optimism and an encouragement to borrow non-sterling currencies, and it struck me as being very out of place, because I regard it as a cause of shame, not encouragement, that we cannot produce from our domestic reserves the money we need.
§ 11.48 a.m.
§ Mr. David Lane (Cambridge)
I apologise to the Chief Secretary and to the House that I was not able to be here last Friday for Second Reading. I shall 778 try to make my intervention now all the briefer for that reason, but I must say that I feel disappointed that since this Bill, we still find a considerable lack of clarity of Government intentions in the areas of policy which the Bill covers.
Let me illustrate this by reference to the three main Clauses. Clause 1, dealing with the increase in the capital available to the Civil Contingencies Fund, as the Chief Secretary explained on Second Reading, is designed to restore flexibility and to bring the financial machinery up to date, but I think it is a fact that there is no sign that the administrative machinery for dealing with civil emergencies is being brought similarly up to date. There was a debate on this last Tuesday, after the Second Reading of this Bill, and I have no intention of going over that ground again, except to say that it was only by inches that, in September, my own constituency escaped serious damage by flooding, and there were many areas in East Anglia which did suffer damage and inconvenience. I wish that the Government would show greater awareness of the widespread feeling—
§ Mr. Speaker
Order. This is not the Second Reading debate. We can only discuss now what is in the Bill.
§ Mr. Lane
I shall not pursue the subject further, except to register my disappointment.
Clause 2 deals with new machinery for passing on a share of the revenue from off-shore gas and oil exploration and exploitation to the Governments of Northern Ireland and the Isle of Man. I am glad to see the Parliamentary Secretary to the Ministry of Power here, because he will be aware of the anxiety among many hon. Members about whether we may be unnecessarily restricting the revenue which will become so payable to the Government of the United Kingdom and the other Governments if the structure of beach prices for natural gas is set too low, since the result of that would be that exploration of additional marginal off-shore areas in the North Sea and the Irish Sea might be unduly discouraged. This would not merely restrict the revenues payable as a result of exploration and eventual development but, more seriously, might limit the addition to our long-term economic strength which all of us believe lies under the sea. I hope that 779 the Chief Secretary will celebrate the passage of the Bill by having further discussion with his colleagues in the Ministry of Power on this very important point.
Under Clause 3, we are going to give the I.R.C. slightly more financial flexibility. But it is sad that the Government have given no sign yet of responding to the dissatisfaction felt in many quarters about the future rôle of the I.R.C. in other directions. I am sure that I would be out of order if I spoke about the multiplication of Ministries in Whitehall, where it is clear that there are too many cooks spoiling the economic broth.
§ Mr. Lane
In relation to Clause 3, there is genuine danger of some kind of confusion developing between the operations of the I.R.C., the Monopolies Commission and the Prices and Incomes Board. There is genuine uncertainty in industry and elsewhere about what the rôles are to be for these three bodies. We have just heard of the slight extension of the Prices and Incomes Board and I shall not further allude to that, but I ask the Government to consider this matter seriously.
The Chief Secretary has this last opportunity on the Bill to make clear the intentions of the Government for the I.R.C. When we want clarification of Government policy, I am not sure that we would go to the Secretary of State for Economic Affairs for it, but I nevertheless ask the Government to take the next opportunity available to tell us more of their intentions for the I.R.C., the Monopolies Commission and the Prices and Incomes Board in the organisation and structure of industry.
§ 11.55 a.m.
§ Mr. Diamond
I am grateful to the Opposition for the welcome they have given to the Third Reading. We have had three speeches from hon. Members 780 opposite. Each of them was interesting and highly relevant, of course, to what is contained in the Bill. I am grateful to them. The main debate has centred on Clause 3. I point out to the hon. Member for Cambridge (Mr. Lane) in particular that it does not relate to the powers of the I.R.C. except to the extent of giving an additional flexibility in its borrowing powers. As you rightly said, Mr. Speaker, all I am entitled to discuss is that variation in its borrowing powers.
The hon. Member for Barkston Ash (Mr. Alison) widened the discussion somewhat and asked, as did his hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke), whether some remarks I made on Second Reading were wholly accurate. First, there is the simple point as to whether borrowing on the Euro-currency market increases the reserves. We normally talk of gold and dollar reserves, and if gold or dollars are added to the reserves, the total becomes to that extent the larger. That is the sole and simple justification I would make of my statement.
It was suggested that I was unduly encouraging this market. I do not know whether hon. Members really meant to say that, but what I certainly meant to convey on Second Reading was that I thought it a useful market. I have no doubt that I am supported by a large section of the City in my view that it should have the chance to develop and that the Government should not restrict it—and the Government do not propose to do so. We look kindly upon this market. It is a useful market and brings income to a number of people in the City. It brings additional sources of useful investment and no problems of a kind that ordinary investment by a foreigner of funds in this country does not bring.
I repeat that borrowing by the I.R.C. on the Euro-currency market does not add to the central Government's borrowing requirements. It is beneficial in many respects and it is not damaging at all. Perhaps I may go on for one further sentence. I do so with hesitation but only to put this matter into context.
The present difficulty arises from an imbalance in assets and liabilities of this country, not in the total. Assets are much greater than liabilities. The difficulty arises from the illiquid nature of 781 our assets and the liquid nature of many of our liabilities, and there is a disproportion. That disproportion is reduced to the extent that the I.R.C. exercises the powers in the Clause in borrowing on the Euro-currency market.
§ Mr. Alison
Is it not the case that funds flowing into the Euro-dollar market are not the same as ordinary foreign investment in this country in factories, etc.? Such ordinary foreign investment will not flow out again but the Eurodollar is "hot" money and surely leads to necessary support on the forward exchange market and to an outflow of funds.
§ Mr. Diamond
I repeat that this market produces no more difficulties than the investment of foreign funds. Of course, its funds are largely retained in their own currency and not as sterling. That is their nature. But I repeat that there is no problem in that sense and, as far as the I.R.C. and this Clause are concerned—if I may be so dogmatic as to refer to the Clause and the Bill—all we are saying is that there exists a market, perhaps good or bad or one to commend or criticise, and that, since every financial intermediary of a similar nature to the I.R.C. has the power and the right to borrow on that market, so should the I.R.C.
I cannot see, therefore, why I should recommend to the House that we should tell the I.R.C., an independent body, "But you shall not have the power to borrow on that market". It would be as ridiculous as to say that it could borrow from any of the big banks except the Midland Bank. It would be unwise and against the wishes of the I.R.C. itself to limit its borrowing powers in this way and we do not seek to do so.
All I can say in reply to the hon. Member for Cambridge without risking your displeasure, Mr. Speaker, is that I have taken careful note of what he said. Perhaps I can improve the situation by saying that I have taken careful and sympathetic note.
With that, I hope that the House will now be good enough to give the Bill its Third Reading.
§ Question put and agreed to.
§ Bill accordingly read the Third time and pasted.