INTERNATIONAL MONETARY SYSTEM (Hansard, 18 June 1974)

HC Deb 18 June 1974 vol 875 cc210-21 210

§ The Chancellor of the Exchequer (Mr. Denis Healey)
In Washington last week I attended the final meeting of the Committee of Twenty of the International Monetary Fund on reform of the international monetary system. At its meeting in Rome in January the committee had decided that for the time being it was impracticable to reach agreement on 211 a comprehensive international monetary reform and that attention should, therefore, be concentrated on a number of steps which could be taken immediately.
With permission, I will circulate in the OFFICIAL REPORT the text of the agreed communiqué recording the conclusions of the Washington meeting, but I will say something more now about the main points.
First, to help rebuild the framework of international co-operation and the authority of the International Monetary Fund, we have agreed to establish a committee at ministerial level to continue the supervision of the international monetary system and its evolution, and to begin the process of amending the IMF Articles to restore their effectiveness.
Secondly, to discourage "beggar-my-neighbour" policies by countries facing unusual balance of payments deficits following the high prices of oil and other commodities, we have agreed on tentative guidelines for the management of floating rates, and on a voluntary pledge against trade and other current account restrictions.
Thirdly, to help in meeting special and immediate financial needs of many developing countries, we have agreed to set up the new "Witteveen oil facility" offered by oil-producing countries for countries in need. We have also agreed to extend existing IMF financing facilities in favour of developing countries, to establish a development council to study the broad question of transfer of real resources to developing countries, and to reconsider the idea of linking the creation of new special drawing rights, or SDRs, with development assistance.
Fourthly, we have agreed on a new definition of the SDR in terms of a basket of specified amounts of 16 major world currencies. The SDR will then reflect the average movement of all currencies, instead of being related to an artificial price of gold or any one particular currency. I believe that this new international asset will be widely welcomed. Oil-producing countries lending funds for the Witteveen oil facility have, indeed, already welcomed it.
Finally, on the subject of gold, which was considered by the Group of Ten out 212 side the Committee of Twenty, I have little to add to the report given to the House by my right hon. Friend the Paymaster-General last Thursday. It was agreed to remove any formal obstacle which might have been held to exist to the pledging of gold in borrowing transactions between monetary authorities. The monetary authorities were already free to sell gold to the market and hence to pledge gold in borrowing from the market if they wished to do so.
The IMF is to give further study to future arrangements, including the possibility of realising a part of the large holdings of gold in the International Monetary Fund. The members of the Committee of Twenty were unanimous in wishing to phase gold out of any central rôle in the international monetary system, and to replace it by SDRs. I supported all those decisions and was instrumental in reaching agreement to several of them.
I believe the conference has taken some useful steps towards dealing with the threat to the international monetary system posed by the exceptional increase in the price of oil and other commodities.

§ Mr. Carr
We welcome the further limited progress made at Washington toward international monetary reform and, in particular, the renewed determination expressed there to discourage the "beggar-my-neighbour" policies by individual countries to solve their own special balance of payments deficits. We also welcome the promise of help for developing countries arising out of the oil situation.
I wish to ask the Chancellor of the Exchequer four questions. First, he refers to a Committee at Ministerial level. Can he say something about the size and membership of that Committee? Secondly, he refers to beginning the process of amending the IMF Articles to restore their effectiveness. Can he give any idea about the scale, purpose and content of the amendments to which he referred?
Thirdly, I notice that in the communiqué it is stated that the committee agrees on the urgent need for stronger action to combat inflation in their individual countries. Can the Chancellor of the Exchequer today, or in the near future, say anything about what part Britain is 213 to play in further strengthening our measures to combat inflation?
Fourthly, can we be assured—I hope, judging from some of the Chancellor's closing remarks, that we can—that he will follow the example of his predecessors in Governments of both parties and make sure that the British Government continue to offer a positive and constructive rôle in developing this international reform?

§ Mr. Healey
I am grateful to the right hon. Gentleman for his welcome of the achievements of the conference.
With regard to the four questions the right hon. Gentleman raised, first the committee at ministerial level will, in effect, be of the same composition and membership as the Committee of Twenty. It is, in effect, the Committee of Twenty in a new form.
Secondly, the amendments which are being considered are primarily designed to regularise practices which have been developed since floating began several years ago and are particularly to regularise floating. No decision has yet been taken to support such amendments. Work is now being undertaken on the drafting of the amendments which would have this effect and which Ministers in the new interim committee will have to consider when the draft is available in February.
Thirdly, with regard to Britain's rôle in combating inflation, all my colleagues were immensely impressed by the success we have had in reducing the rate of increase in the money supply and in reducing the public sector borrowing requirement from its excessively high level of last year.
On the question of the contribution which Britain hopes to make, I can say without exaggeration that both the agreement on the use of gold as collateral for borrowing between central banks and the agreement to reconsider the link between the SDR and developing countries arose largely as a result of the actions of the British representatives.

§ Mr. Duffy
In view of the problem of international liquidity and the consequential danger of restrictive trade measures following the sharp increases in oil prices, is my right hon. Friend satisfied that the ministerial committee which has been set up to strengthen the IMF 214 will be adequate, especially in view of the restrictive measures already undertaken by France?

§ Mr. Healey
I do not think that it is fair of my hon. Friend to suggest that France has taken restrictive measures on international trade. There may be different views about the effect of France's internal domestic measures in reducing the total demand in France, including demand for foreign imports, and there may be different views about the efficacy of the measures to which the new French Government have addressed themselves. But by and large the French Government have adopted a package of measures similar to those which I put to the House in my Budget speech on 26th March. The only countries which have taken measures directly affecting foreign trade are Italy and, to a smaller extent, Denmark.

§ Mr. Pardoe
Is the Chancellor aware that the latest and final meeting of the Committee of Twenty will be a profound disappointment to those who expected it would measure up to the demands of the world economy? Does he agree that he took nothing to Washington and brought nothing back of significance?
We regard it as regrettable that the right hon. Gentleman's statement has not mentioned even once the problem of inflation, although I recognise that the communiqué did. Can he point to a single thing in the communiqué or statement which will stop world economics going down into "slumpflation" of the worst possible sort?

§ Mr. Healey
With respect to the hon. Gentleman, he betrays in his remarks a certain ignorance of the situation. The views he has just expressed are not shared by any of the Governments represented in the Group of Twenty.
With regard to the specific questions the hon. Gentleman raised, we are concerned that all the actions taken to assist the developing countries, which will suffer more than any of the developed countries will from the recent oil price increases, are a real contribution towards meeting their problems. I am surprised that as a representative of the Liberal Party he does not seem to be aware of their real importance and the extent to which they were welcomed by representatives of the developing countries at the conference.

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§ Mr. Hooley
Is my right hon. Friend aware that the emphasis on the rôle of SDRs in international monetary arrangements will be very much welcomed? May I ask him to introduce some sense of urgency in obtaining a link between SDRs and helping the developing countries?

§ Mr. Healey
I think that I played some part in persuading those countries which were reluctant to accept the possibility of a link between SDRs and the needs of the developing countries to do so. I very much hope that the reconsideration now in train will lead to decisions about a new creation of SDRs in the near future from which the developing countries can benefit disproportionately.

§ Mr. Tugendhat
Does the right hon. Gentleman believe that the decision taken about gold is a step towards the demonetisation of gold or a step back from the demonetisation of gold? Is he aware that those of us who were not present at these discussions find it difficult to reconcile what has happened with the aims which he put forward? Would he not agree that this is, almost by definition, a temporary situation? Can he say what he believes is likely to be done about setting a value to gold in the use to which it is to be put?

§ Mr. Healey
I know that the hon. Member follows these matters closely. The Committee of Twenty was unanimous in wishing not to fix a new official price for gold. If I were to make a judgment about the arrangements to use gold as a collateral for borrowing between central banks I would say that it is entirely neutral from the point of view of the demonetisation or remonetisation of gold because it cannot lead to an increase in the total stock of monetary gold in the world, and it is envisaged that a minimum period for such loans should be fixed. This would ensure that such loans were not a disguised way of transferring gold or selling gold from one central bank to another, although I, like my European colleagues, would wish that this were possible. The hon. Member will accept that the official price for gold is artificially low. Equally, the free market price for gold is artificially high, because those who own most of the gold are not selling it on the market. It is inevitable that the price which is agreed between central banks using gold as a collateral will be higher 216 than the official price and lower than the current market price. If the IMF proceeds with its present intention of releasing some of its gold stocks, hopefully to create additional liquidity for the developing countries, that will tend to depress the price of gold and to reduce the total amount of gold in monetary stocks. The same effect would arise from the American Governments intention to allow private citizens to buy gold, if they bought it from the American Government. All of these questions are still for consideration.

§ Mr. Dalyell
Is my right hon. Friend aware that in the opinion of some rather hard-bitten international financial observers the success of this conference owes a great deal to his and to British initiative and that this is to the credit of the Government and the delegation? May I ask on what criteria the SDRs for developing countries will be given? Will there be more emphasis on infrastructure, schools, roads and irrigation and perhaps rather less on industrial development? On this question of gold and collateral, are there not dangers that this could be a slightly regressive element of the package?

§ Mr. Healey
I am grateful to my hon. Friend for his initial remarks. No decision has yet been reached on how the new creation of SDRs shall be distributed. It is the view of the British Government, and nearly all the Governments in the International Monetary Fund, other than the German and American Governments, that there should be some link between the creation of the new SDRs and the provision of aid to the developing countries. I will certainly work to achieve that end. If the Fund decides to create a link between SDRs and aid to the developing countries, that will not be related to any specific projects. The question of project control and selection is more a matter for loans which are made by the International Bank or other international authorities, such as the Development Assistance Group of OECD.

§ Mr. Norman Lamont
Is the right hon. Gentleman aware that the changes relating to gold will be much welcomed as being a move towards realism? Was not one of the arguments that used to be advanced against altering the price of gold that it would be highly inflationary? Now that gold reserves have effectively 217 been increased by about 60,000 million dollars, may I ask the Chancellor to confirm that the need to eliminate the non-oil deficit of countries still remains a top priority?

§ Mr. Healey
If the use of gold as a collateral led to an increase in liquidity which would not otherwise have been achieved, it could be inflationary. If I may give a personal view, I doubt whether any Government, except possibly the Italian Government, will make use of this collateral as a means of achieving loans which they could not have achieved by other means. I think that with Italy it simply makes it marginally easier for one potential lender to lend money to Italy than might otherwise have been the case.
All of us have agreed in theory that it is desirable that the countries with large oil deficits arising from the inability of the oil-producing countries to absorb goods to the value of the oil sold should not seek by restrictive or other measures to close those oil deficits. I do not know whether that theoretical obligation will be generally accepted. I believe it is important that so long as the absorptive capacity of the producer countries is as limited as it now is the consuming countries should be satisfied to eliminate their non-oil deficits and seek to finance their oil deficits by other means.

§ Mr. Skinner
Will my right hon. Friend accept that this meeting which he has attended is just another of the many that we have witnessed over the past few years in which capitalism within the West generally is trying to combat the ever-broadening and deepening crisis? Will he also accept that the exercise being gone into with Italy concerning gold is merely a way of postponing the debt and could be described as pawning Italy's assets? Will he, therefore, categorically deny that there will be any attempt to agree with the other Common Market countries about the use of our natural assets, in particular oil, in the same way in view of the crisis with which we are faced? Will he also say whether he told the French, arising out of M. Simonet's remarks about selling oil to the EEC at the same price as to the British consumer, that as a country, as a Labour Governmnet, we would not wear any of that?

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§ Mr. Healey
In so far as it is my responsibility, I can give my hon. Friend the assurance for which he asks in the latter part of his question. As to the first part of his supplementary question, I can assure him that international debt is not a monopoly of capitalist countries. There are quite a number of Communist countries, or, as they would call themselves, Socialist countries, which have very large international debts which create serious economic problems for them and their creditors. As for co-operation inside the International Monetary Fund, my hon. Friend will be glad to know, if he did not know beforehand—as I suspect may be the case—that there are now a number of Communist countries which are members of the IMF and which played a full and constructive part in our proceedings.

§ Mr. Ian Lloyd
While I do not entirely share the Chancellor's views on the price of gold, I accept that there are important differences here. Would the right hon. Gentleman agree that the new arrangement between the S.D.R. and the "basket" of currencies, which implies no relationship in any real sense, merely expresses a weighted average of the degree of the financial irresponsibility of 16 countries?

§ Mr. Healey
Relating the value of SDRs to a "basket" of real money is preferable to relating it to the value of a commodity whose real use is limited to the construction of false teeth and costume jewellery.

§ Mr. Atkinson
Is my right hon. Friend familiar with the widespread disquiet throughout the Labour Party about this method of major decision making? Is he further aware, when he announces that we are now committed not to impose any restraints on international trade, that this is contrary to Labour Party and trade union policy? Therefore, would he not agree that there are other ways in which we should come to conclusions rather than on this individual basis of international agreement, without consultation with the party he represents domestically?

§ Mr. Healey
With respect to my hon. Friend, I am not aware that the assertion he made at the beginning of his supplementary question is accurate. I have not 219 found it to be so in my own contacts with my party. With regard to trade restrictions, the future growth of this country depends very largely on the annual increase in our exports. Steps we took which led to retaliation against us and to a constriction of international trade would be gravely damaging to all the purposes which our party seeks to serve.

§ Mr. Robert Carr
With regard to timing, the Chancellor referred to the programme being available about February, eight months from now. I presume that means it could not possibly be approved by the committee until the autumn of 1975. Is it not possible to inject more urgency and speed into this very urgent matter?

§ Mr. Healey
I think the right hon. Gentleman is confusing several matters. All the decisions taken by the Committee of Twenty are likely to be ratified by the IMF as a whole when it meets in Washington in September. There are a number of matters—notably the decision whether or not to amend the articles of the IMF, whether or not to create a link between SDRs and aid to the developing countries, and whether or not to revise the basis on which the IMF quotas are now distributed—which come up for decision in February. All the other decisions to which I have referred will, I hope, be ratified by the IMF as a whole at its meeting in September.
The decision on gold—which is not one for the IMF but for the Group of Ten, which is not a body of the IMF—takes effect from now.

§ Following is the information:

§ Communiqué of the Committee of the Board of Governors on International Monetary Reform and Related Issues

§ 1. The Committee of the Board of Governors of the International Monetary Fund on Reform of the International Monetary System and Related Issues (the Committee of Twenty) held its sixth and final meeting in Washington on 12th-13th June 1974, under the chairmanship of Mr. Ali Wardhana, Minister of Finance for Indonesia. Mr. Johannes Witteveen, Managing Director of the International Monetary Fund, took part in the meeting which was also attended by Mr. Gamani Corea, Secretary-General of the UNCTAD, Mr. Frederic Boyer de la Giroday, Director of Monetary Affairs of the EEC, Mr. RenéLarre, General Manager of the BIS, Mr. Emile van Lennep, Secretary-General of the OECD, Mr. Olivier Long, Director-General of 220 the GATT, and Sir Denis Rickett, Vice-President of the IBRD.

§ 2. The Committee concluded its work on international monetary reform; agreed on a programme of immediate action; and reviewed the major problems arising from the current international monetary situation.

§ 3. The programme of immediate action is as follows:

(a) Establishment of an Interim Committee of the Board of Governors of the Fund with an advisory rôle, pending establishment by an amendment of the Articles of Agreement of a Council with such decision-making powers as are conferred on it.
(b) Strengthening of Fund procedures for close international consultation and surveillance of the adjustment process.
(c) Establishment of guidelines for the management of floating exchange rates.
(d) Establishment of a facility in the Fund to assist members in meeting the initial impact of the increase in oil import costs.
(e) Provision for countries to pledge themselves on a voluntary basis not to introduce or intensify trade or other current account measures for balance of payments purposes without a finding by the Fund that there is balance of payments justification for such measures.
(f) Improvement of procedures in the Fund for management of global liquidity.
(g) Further international study in the Fund of arrangements for gold in the light of the agreed objectives of reform.
(h) Adoption for an interim period of a method of valuation of the SDR based on a basket of currencies and of an initial interest rate on the SDR of 5 per cent.
(i) Early formulation and adoption of an extended Fund facility under which developing countries would receive longer-term balance of payments finance.
(j) Reconsideration by the Interim Committee, simultaneously with the preparation by the Executive Board of draft amendments of the Articles of Agreement, of the possibility and modalities of establishing a link between development assistance and SDR allocation.
(k) Establishment of a joint ministerial Committee of the Fund and World Bank to carry forward the study of the broad question of the transfer of real resources to developing countries and to recommend measures.
(l) Preparation by the Executive Board of draft amendments of the Articles of Agreement for further examination by the Interim Committee and for possible recommendation at an appropriate time to the Board of Governors.

These measures are described in more detail in the statement attached to this communiqué.

§ 4. Members of the Committee expressed their serious concern at the acceleration of 221 inflation in many countries. They agreed on the urgent need for stronger action to combat inflation, so as to avoid the grave social, economic and financial problems that would otherwise arise. They recognised that, while international monetary arrangements can help to contain this problem, the main responsibility for avoiding inflation rests with national governments. They affirmed their determination to adopt appropriate fiscal, monetary and other policies to this end. In the discussion Members of the Committee urged that the multilateral trade negotiations in the framework of GATT should continue to be regarded as a matter of priority.

§ 5. The Committee noted that, as a result of inflation, the energy situation and other unsettled conditions, many countries are experiencing large current account deficits that need to be financed. The Committee recognised that sustained co-operation would be needed to ensure appropriate financing without endangering the smooth functioning of private financial markets and to avert the danger of adjustment action that merely shifts the problem to other countries. Particular attention was drawn to the pressing difficulties of the most severely affected developing countries. Members of the Committee therefore strongly emphasised their request to all countries with available resources and to development finance institutions to make every effort to increase the flow of financial assistance on concessionary terms to these countries.

§ 6. In concluding its work on international monetary reform, the Committee agreed to transmit a final Report on its work, together with an Outline of Reform, to the Board of Governors. These documents will be published shortly.