International Monetary System

HC Deb 24 March 1983 vol 39 cc1117-34

11.8 pm

Mr. Bowen Wells (Hertford and Stevenage)

I raise this vital issue late at night, keeping out of bed hon. Members, staff of the House, my hon. Friend the Economic Secretary and your good self, Mr. Deputy Speaker, because without a satisfactory reform of the international monetary system the British economy cannot expand to provide the additional jobs that our unemployed so desperately need. Britain, as a trading nation, depends crucially on the health of the international trading community. I need not remind the House that we export about 30 per cent. of our gross domestic product, a much higher percentage than any other industrialised nation. Without an expansion in world trade, our only opportunity to expand domestic production is to obtain a greater share of a contracting and highly competitive market. Therefore, Britain is crucially dependent on a recovery and an expansion of world trade.

My right hon. and learned Friend the Chancellor of the Exchequer can go on pursuing doggedly his domestic financial policies that encourage the establishment of new companies, encourage and reward our people for working hard, bring down inflation, stabilise prices and reduce interest rates, but those policies alone cannot bring employment or prosperity to our people. Another international element must be introduced.

If it is correct to state that without stable prices, low interest rates and sound predictable money we cannot expect to encourage investment in businesses in this country because we cannot be certain that we will get our money back or even whether we will make a profit or a loss, the same argument must apply internationally. It is certainly true for the many British companies which invest and trade overseas. An unpredictable change in exchange rates, overseas interest rates or low commodity prices can turn an efficient and modern investment in, say, sugar or a copper mine, into a massive loss from a predictable, comfortable profit so quickly that no one has any possibility of adjusting to the changes.

The result is that those with money are reluctant to invest because they simply cannot predict the return. This adds to the ever-increasing amount of cash that is sloshing around the world looking for a safe home, thus exacerbating the yo-yoing exchange and interest rates and producing great instability and volatility.

Both domestically and internationally, Britain needs a stable and predictable international monetary system. We certainly do not have it at the moment. I speak on the day when sterling has reached an historically low figure in its exchange value against the US dollar, when not many months ago it was at US $2.50.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

It was higher than that.

Mr. Wells

My hon. Friend tells me that it was higher than that.

What effect will this have on the Government's hard-won fight against inflation? The Prime Minister is loth to predict. It must have an effect on inflation in an upward direction in the not-too-distant future unless the trend reverses itself, which it might well do, because of the volatility of the current position. This is sheer chaos and lunacy.

When I talk to Treasury and Government officials and Ministers, they all look worried, dive for their statistics and conclude that nothing can be done because Britain cannot affect the issue by itself. That is true, but it is not an excuse for doing nothing. It is a man-made phenomenon and must be capable of solution by men determined to solve the problem.

I studied economics at university long enough to develop a very healthy scepticism about economic theory and planning. I am not a believer in any economic theory, knowing the fallacious assumptions upon which most of those theories are built. That is not to say that they are useless, but having looked at how the factors taken into account might vary in certain circumstances one realises that they should, like corporate plans of companies, be put in a drawer and forgotten until next year. I am not a Keynesian, a monetarist or a Friedmanite. We must deal with the world as it is.

Undoubtedly, one of the causes of the instability in our monetary system has been the degree to which inflation has been allowed to let rip and by Governments permitting budget deficits to develop of huge proportions.

Great credit must be given to the Government for controlling and disciplining the economy. As the exchange rate today demonstrates, this is not enough. I would not presume or pretend that I know the solution to the problem, but, unless we tackle it with the determination to solve it and in a belief that it can be solved, it never will be solved.

The Government, in their evidence to the Treasury and Civil Service Select Committee, to whose interim report on international monetary arrangements I pay tribute, give the impression of regarding the hunt for a solution as being hopeless and beyond their physical and mental capacity. However, I was delighted to see on page 15 of the evidence taken on 14 June 1982 the following statement by the Treasury: There must also be the general political will for reform if the resumption of a search for a new system is to be fruitful. This would seem to require a greater level of dissatisfaction with present arrangements and a clearer view of feasible improvements to them than is evident at the present time. My object tonight is to make my contribution to the generation of that political will. My right hon. and learned Friend the Member for Hexham (Mr. Rippon) did the same in the Christmas Adjournment debate. We must continue to raise this issue time and again until the Chancellor of the Exchequer and his Ministers get off their backsides and begin to try to lead the world into a better international monetary system. This is the one issue that is of vital and overriding importance to a solution not only of our problems, but of those of the Third world and the other international economies.

We now have the opportunity to do something, with the election of the Chancellor of the Exchequer to the chairmanship of the interim committee of the International Monetary Fund. I congratulate him on that. He can now claim the prestige that attaches to a Chancellor who has succeeded in reducing inflation and controlling domestic public expenditure. He has now presided over a successful realignment of the currencies within the European monetary system. We must now encourage and beg him to inspire the establishment of an orderly international monetary system.

Before turning to how we might tackle the problem, I shall remind the House that although we will be talking about money, trade and finance, we are really talking about people. We are talking about whether people will starve or live; whether, if they live, they will live a life that is pitifully stunted by poverty or a life in which they can fulfil some of their personal ambitions, living with dignity in this world and contributing to their families' welfare and that of mankind. After all, the decisions taken will affect the vital interests not only of Britain and the so-called developed world, but of the Third world, where the population is exploding. That population explosion alone will affect our monetary system and a new monetary system must be responsive to that population's needs. It offers an opportunity to the developed world to supply some of the needs of that population, but, mishandled, it also presents a deadly threat to the living standards and even the supply of that basic necessity, food, to our own people.

As the Secretary-General of the Commonwealth, when addressing the first meeting of the Commonwealth Bretton Woods study group, said: Economists, I find, are at their best when they recall that their discipline is about people and their lives, about countries and the world community. I have said that I am not an economist and I cannot pretend to know the answers to such complex problems. However, I shall make some observations on the present situation and I shall ask some questions of my hon. Friend the Economic Secretary. I hope that he will not take refuge in platitudes or banality but will come out strongly with a statement of his own ideas and demonstrate his and the Government's determination to seek a settlement. His reply to my right hon. and learned Friend the Member for Hexham on 23 December 1982 was a little unconvincing and lacked his characteristically trenchant and perspicacious style. He never answered the question that he was asked as to whether or not he favoured the convening of another Bretton Woods conference, as called for by Mr. Reagan in Frankfurt, or by the Prime Minister of New Zealand, Mr. Robert Muldoon—that well-known Socialist—who called for a "world economic conference."

I assume that it is accepted as common ground that the floating exchange rate system has failed to impose the necessary discipline on domestic economies and is therefore responsible in part for the inflationary policies pursued relentlessly by some countries, including Britain, has undermined the value of currencies and has led to competitive interest and exchange rates.

Instability has resulted in a contraction of world trade and the move towards protectionism has become irresistible to some, including many Members of the Opposition.

I hope that we have now concluded that the experiment of using special drawing rights as a reserve should be abandoned. Does my hon. Friend the Economic Secretary accept the analysis and critique of Paul Boreau in the Wincott memorial lecture that he gave on 21 October 1981? His devastating criticism of SDRs identified three major flaws. First, they are not independent of national currencies on which their value is based. If world currencies are mismanaged, SDRs will be mismanaged. They cannot be an independent barometer of domestic economic mismanagement or success and therefore cannot impose the necessary automatic disciplines. Two, SDRs are less attractive than the strongest component currency which underlies their value. Therefore, the strongest component currency becomes the reserve currency.

Three, the effect of issuing SDRs as outright gifts, with no conditions as to their use, has undermined the basis of IMF operations. The IMF has insisted always, as the price of additional reserves and credit, that conditions on discipline are imposed on the recipient, as with all other IMF loans and assistance. The Third world's argument, therefore, for the abolition of conditions on loans to it from the IMF becomes irresistible.

"Common Crisis", or "son of Brandt" of course calls for a major issue of SDRs. Presumably, those SDRs will be issued without conditions and Governments of the recipient countries will escape any necessity to change or improve their domestic economic policies.

Does my hon. Friend the Economic Secretary agree that gold should be reintroduced as a currency reserve to recreate the external disciplines on an economy and for restoring stability to exchange rates?

Mr. Frank Hooley (Sheffield, Heeley)

Gold? Churchill!

Mr. Wells

No, it is different from Churchill in the 1920s. Gold would be the ultimate reserve currency into which, under a multiple reserve currency system, any of the currencies could be converted by Governments alone. The rate at which conversion would take place would be flexible. It would take account of the expansion or contraction of world production, trade and investment. Such a system would reimpose a discipline on reserve currencies, such as the dollar and sterling, which have succumbed in the past to the temptation to run consistently huge budget deficits. The Americans would find it difficult to adjust.

Therefore, I should be glad to know whether my hon. Friend the Economic Secretary has any idea of how the Americans are thinking about these issues. My hon. Friend will recall that it was the agreements of Mr. White and Mr. Keynes which virtually brought about the Bretton Woods agreements; therefore, the American decision is vital important if there is to be a breakthrough. The difficulties would have to be sorted out at a second Bretton Woods conference for which President Reagan has clearly called.

Mr. Beaumont-Dark

My hon. Friend makes the point about gold as the reserve currency. Surely, does he not accept that one of the problems that overtook the world in the 1920s was that gold was looked upon as the reserve currency? It stultified economic growth. If we were to have anything as a reserve currency, surely it would be oil certificates which would make at least growth certificates. Does my hon. Friend agree that one is not trying to stultify growth but to ensure that the Third world, which has little to offer except its poor, has a chance to expand? That can be upon the concessions and hope of the Western world only. I do not see how gold would be a genuine reserve currency, except for those who have it already.

Mr. Wells

My hon. Friend is right about the problem of gold in the 1920s and the 1930s. Even under the Bretton Woods arrangement, it was a difficult matter to deal with. During that period gold was fixed at a parity, as my hon. Friend knows, of $35 to the ounce. That was an inflexible and stultifying arrangement. Growth in the world did not produce the right amount of liquidity necessary for the development not only of the Third world but also of the developed world. In a return to any kind of gold standard or reference to gold, there is no doubt that we must avoid those rigidities.

In moving to floating exchange rates and SDRs, we have thrown out the baby with the bath water on the issue of gold. It is necessary to discuss a method of linking currencies to some kind of valuable asset. My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) suggests oil. We have seen the volatility of oil prices. They have not been as volatile as gold in recent months but oil is nevertheless unlikely, because of its quantity, to be a satisfactory method. I am not advocating gold as the only solution. We could make a convertible currency into oil prices if we so chose. It has to be converted into something that is tangible and regarded as valuable and stable.

Mr. Regan, of the United States Treasury, has already called for a Bretton Woods conference. Will the British Treasury back such a conference and enthusiastically embrace the idea of promoting such a conference? If not in favour of a conference immediately, is it in favour of an exchange of ideas with a view to convening a conference before long?

It is clear that the current system of floating exchange rates and SDRs has failed to discipline and control the world's monetary system. A new one needs to be thought out and implemented immediately. Failure to do so will make it difficult if not impossible for the industrialised countries to conquer unemployment and the misery it brings. The growth of population, combined with further impoverishment of the Third world, will lead to starvation for millions of human beings. Will the Minister demonstrate tonight that he has the determination to exhibit the political will necessary to find an international solution to the problem? I am calling for the same determination and doggedness that my right hon. and learned Friend the Chancellor of the Exchequer has demonstrated domestically to cure our own inflation and profligacy.

I am sure that the Treasury team can do it. I dare them and beg them to give a lead in seeking reform of the international monetary system which would bring order out of chaos, replace contraction of trade with expansion, and replace starvation with prosperity.

11.27 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

I am sorry that I cannot agree with the hon. Member for Hertford and Stevenage (Mr. Wells). The hon. Gentleman asks for more flexibility. He must understand that the present rigidities of monetarism would be flexible by comparison with the greater rigidities of the gold standard. To replace one evil, witnessed over the past few years, with an even greater evil, would be to fly in the face of any experience that the Government might have acquired over the past few years.

The most important development that we might hope to see from the International Monetary Fund is the restoration of its position as the body that looks after these matters and is under the control of Governments, and therefore under the control of statesmen and politicians. The International Monetary Fund was devised to deal with just the kind of crisis with which we are confronted. The saddest aspect for those who had such hopes and expectations during its formation is that it is manifestly failing to deal with the greatest crisis seen since its inauguration.

The first priority of economic policy throughout the world should be the restoration of full employment. Even if unemployment has seriously deteriorated in recent years due to a continuing world-wide economic crisis, there is no reason to abandon full employment as the most important objective of international economic policy. On the contrary, in view of the clear need for that objective to be established throughout the world, many people envisaged the International Monetary Fund as the body to achieve that aim and its failure to do so has been its greatest failure.

Instead, the ideas pursued by the British Government have spread to most of the economies of the industrialised world. The savage rooting out of inflation that was begun in this country has now become part of the general philosophy of many other industrialised countries of the Western world where it is often regarded as the necessary pre-condition for improved employment. It is held that if inflation can be reduced unemployment will then be solved by some magic formula. We have seen that that is nonsense. As inflation has fallen in this country, unemployment has continued to rise. The same applies to other countries, for the same reasons. There is nothing in the reduction of inflation that leads automatically to increased employment.

The strict monetarist measures introduced first in this country and later elsewhere have led to the paralysis of economic dynamism and the erosion of growth potential. The Bank for International Settlements considered that there was almost a test bench experiment in this country, and it is clear that the experiment has failed. The same experiment was carried out in Chile and it failed in exactly the same way, just as so many anti-monetarists had predicted. Not only have we lost the high employment that we used to enjoy, but we have lost the growth potential that was part of the Western industrialised scene.

The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)

Will the right hon. Gentleman date the so-called monetarist experiment more precisely? His right hon. Friend the Member for Leeds, East (Mr. Healey) said when he was Chancellor of the Exchequer that no Government since the war had given greater priority to the observance of monetary guidelines than the Labour Government, in which the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was also a Treasury Minister. If it was an experiment, therefore, it dates from well before the Conservatives came to office.

Mr. Sheldon

As the hon. Gentleman was an observer of these matters long before he became a Treasury Minister, he will know that the monetarist diversions of the Labour Government were a small matter compared with what has happened since. He will recall that growth levels were still considerable. Indeed, they were large by comparison with the negative growth that we have experienced since.

The major experiments in monetarism took place in Chile and in Britain. It took place in Chile, where the Chicago school thought that it would be carried out to the fullest extent possible, and it took place in Britain with the endorsement of bankers who saw it as the most important experiment to be carried out among the major industrialised countries.

Abrupt oil price changes added to the problems and had a major bearing on the western world's weak international performance. The two oil price shocks produced wild swings in exchange rates and interest rates, which have become almost completely unpredictable. This has added to the general uncertainty, which has seriously encroached upon investment decisions in the industrialised countries.

The restoration of growth and the consequent smoothing of adjustment problems would contribute much to the improvement in trade relations and lessen the danger of the international financial crisis which many have foreseen.

We see throughout the industrialised world that unemployment is hitting hardest young people, especially school leavers, who cannot find a first job. Consequently, they are not able to integrate themselves into a Western industrial society. In Britain and elsewhere unemployment periods are becoming longer and longer and leading to deeper and deeper frustrations among the millions who are seeking jobs for the first time.

The developing countries are causing many of the current problems in the banking sector. This cannot be otherwise. As world demand diminishes, the ability of these countries to export their goods declines. As deflation increases, the interest that they have to pay on their loans increases also. We are throttling the developing countries by denying them the opportunity to increase their exports and asking even greater sums from them in interest payments on their already over-large loans. We are facing the developing countries with no possibility of escape. These countries, with the best will in the world and with the most efficient and effective Governments, which frequently they do not have, are not able to make anything like a restitution of their debts or interest charges.

Because of that, a lifeboat comes to the rescue, which doles out more and more money to compensate for the nonsensical international banking system which the industrialised world has created. The developing countries have been at fault on many occasions in the past, but that is not so on this occasion. The fault lies with the industrialised countries, which have pursued polices to their disadvantage and to that of other countries that rely upon them for sources of finance and as outlets for their exports.

The strict monetarist principles that have been implemented have done nothing but deepen the recession. However, one small sign of comfort that we see approaching is the recent softening of the attitude of the United States and the relaxing of its strong and strict monetarist position. Interest rates have decreased and this has increased the scope for reflation both in the United States and in Europe. However, the present level of real interest rates at about 5 per cent. is far too high for the restoration of steady recovery in the international economy.

In the past few days and weeks we have seen a weakening of the oil markets. We are oil exporters, so at least one element of comfort can be gained from the easing of the markets and inflationary pressures as the international economy weakens. It is important not to regard that as the automatic precursor to expansion, but we must make it so by distinct and clear policies.

We must not allow the experiment of one or two countries, regarded as the locomotive countries, to start off and not be followed by others. In the past, one or two countries have believed that the monetarist experiment was wrong and have tried to expand their economy in a modest way, but have not been followed by others. As a result they have run into balance of payments difficulties. A co-ordinated expansion of all the major countries is essential. That is the IMF's task. No other body can do it. The IMF is led by politicians and statesmen determined not to sit back and watch those countries expand and be forced to retract the only policies that make sense. There must be an agreed expansion. Perhaps we shall have to wait until a greater degree of common sense strikes the people of such countries. In the meantime, we must argue and hope that realism will finally break through.

What do we require from the IMF? We require economic policies internationally co-ordinated according to the circumstances in the countries concerned. There must be a great deal of trust and confidence. That might not be realised and so we shall not be successful in overcoming the grave crisis. Those who come after us will not be grateful to us for missing an opportunity.

We also need a systematic intervention to foreign exchange markets by the central banks to get a more balance exchange rate. I am not a follower of any special method of achieving that, but there is scope and there should be the will to bring together some of the disparities in currencies. It cannot be right that the pound should be worth $2.45 one year and $1.45 two years later. That cannot make sense. There have been many changes, but it cannot make sense almost to halve the value of currency in such a brief period. If the IMF consisted of people with greater vision and understanding and a greater measure of agreement, such an absurdity could not exist.

It is also important to avoid defensive and protectionist measures. The IMF has a role to play. The resources of the financial institutions need to be further strengthened to assert the power of the combined forces of industrialised countries looking after their own interests and to bring the world crisis under control.

Mr. Bruce-Gardyne

The right hon. Gentleman referred to the need to avoid protectionism and protectionist barriers to trade. Can be assure the House that that statement is compatible with the policy documents that emanate from his party, calling for what is euphemistically described as managed trade?

Mr. Sheldon

The Minister knows full well that the Secretary of State for Trade has been negotiating with Japan on certain understandings. They are forms of selective controls of a type that we would continue. They must form part of any international situation that is under pressure.

The IMF should also be conducting negotiations between North and South. It has an obligation, not only to co-ordinate the industrialised economies but to attain a better relationship between those economies and the developing world. I mentioned earlier the need to ensure more world demand so that the raw materials and products of developing countries have an outlet, so that they are enabled to pay off their debts, and lower interest rates, which would reduce the interest on outstanding loans. Many countries are increasingly unable to pay the interest on their loans, let alone part of the capital. That cannot be right and it can only plunge the world into an even greater recession and, possibly, disaster.

Those are objectives which, at a time of peril, ought to be regarded as capable of being settled by participating countries making much greater use of the IMF as the means for resolving such difficulties. If this debate merely shows the importance of the IMF and the present inadequate response of its member countries, it will have been worth while.

11.46 pm

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

This is an important debate. We often debate the problems of the Third world late in the night. The time is late here, but it is not half as late as it is for those who are unwilling victims of the system under which they live. I forget the poet, but I remember the couplet which runs: Life without hope is like a seive, Life without hope cannot live. We talk of people who have died in wars and exercise our minds about those who died in the nuclear holocaust at Hiroshima all those years ago and regard it as a great evil. All death is an evil, but we do not often pause to think that, in every three minutes, more people die of starvation than died in that one great fireball in 1945. We cannot envisage that changing. That holocaust encourages people to sit at Greenham common, to rend their garments and to disturb the lives of others in a prosperous Western world.

The real problem is that what we call problems, sadness and unemployment are riches to the majority of the world that we only visit on holiday, as I recently went to Kenya, whether it be Africa or South America. One need only move outside the ramparts of the Western world to see the degradation and despair of those who shuffle round this world.

Our monetary problems are serious to us, and they disturb our way of life, but they do not cause us great despair. The problem is that, in the undeveloped world, as the population grows, the agony grows. In 1975, oil was $3 a barrel, but now it is claimed that, because the price is likely to go below $30 a barrel—still 10 times what it was then—it is a great tragedy and an unsettling influence. What are our problems? We live in a world of inflation without growth, while everyone else lives in a world of dreams without substance. Unless we recognise that, to have a peaceful world we need not rely only on the force of arms but on our willingness to share some of the treasures of our lives with the Third world, a much greater holocaust may yet come.

Of course, we must think of ourselves and we must recognise that we have been brought up to believe that, as the sun rises in the morning and sets at night, our standard of living will inexorably increase. But it will not, because in the Western world we must export and import. As I said in another debate in the House before Christmas, what we see as lower inflation can often mean starvation to the rest of the world. We export manufactured goods, but we must import commodities, and unless e pay a proper price for those commodities, which are often all the Third world has to offer, it can mean starvation to them. We must ask ourselves whether the saying, Am I my brother's keeper? is true, and it is easy—whether from the pulpit or in the House—to answer, "Yes, we are our brother's keeper". But when we give that answer, we must be willing to make sacrifices to ensure that our brother does not starve. It is difficult to have a unified approach.

There is an international crisis at present because of the price of oil, but bankers in the Western world have been willing to recycle huge sums of money that have been rushed round the world and lent on a short-term basis for long-term projects. Whenever the world becomes nervous, they want the money back. Now, because nerves are fraught, bankers who have lent money that they do not own, from people who did not realise that they were lending it, want it back. We have heard what the International Monetary Fund and the World Bank can do, but they can only help to solve the crisis that envelops us all. I must insist that the world in which we live is prosperous beyond all dreams of reality for most of the world's population. Unless we are willing to say that we—not just the IMF or the World Bank—will recycle that money on a long-term basis, the world is doomed to a despair that we have not seen in this generation or any other generation for some hundreds of years. It is not a matter of passing the problems of the world on to the IMF or the World Bank. Their strength lies only in the resolve and the willingness of our Western world to make some sacrifice to ensure that this does not become a wretched despair.

The Government and the country have been willing to show that they are prepared to place resources in the control of the IMF and the World Bank. More help will be needed. Countries in South America and Africa have no hope of repaying the money that the Western and Arab worlds have lent them. If we insist on the recall of the money, all we do, like Samson, is to pull the temple of our lives down about us. We have to think carefully about where we stand, for we have all been profligate. The Arab countries were greedy and remorseless when they put the price of oil up from $3 to $34. We have been remorseless and foolish in lending money on a short-term basis for long-term projects.

If we have a hope at all, it is that we keep together and realise that the small sacrifices that we need to make will result in some hope and some financial security for our world. It is not, as T. S. Eliot says, that the world goes with a bang. It is much more likely to go with a whimper. It is not wars that will destroy. All history tells us that it is the natural folly of man that destroys the hopes ad futures of generations.

If we should concentrate on anything, it is not on the fears of nuclear wars or holocausts. It is the fear that we, out of greed, and without a sense of reality in the Western world, will see that other people starve. If anything should haunt any of us, it is the war to see that people may live. One may live in a prison that is not just behind bars. Any person who starves and who is without a hope of tomorrow is living in prison. That is why I tire and become sick of those who live in prosperity in this country and who keep on about war. The war that we face is to see that men and their families may live and eat. If one does not have food, cover and heat, that is oppression, not nuclear wars. Nuclear wars are not likely to happen, because we are all to self-interested in surviving.

While we worry about nuclear war, we should always remember that every three days more people die from starvation than would die in what I tire of hearing about—a nuclear holocaust. That is what the Western world should be thinking of and that is what the international monetary crisis means. How are we to hold the world together, in which we all live for so short a time?

11.55 pm

Mr. Austin Mitchell (Grimsby)

We have had an interesting contrast of views on the Conservative Benches. The hon. Member for Hertford and Stevenage (Mr. Wells) told us that he was no economist, and then proceeded to demonstrate that fact at length, whereas the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) made a speech which contained noble sentiments, contrasting strangely with his advocacy of the Government's domestic policies, which to a large extent have caused the problems of the developing world which he so nobly lamented. Both points of view essentially defended the Government's economic policies, which have been largely instrumental in causing the depression in the developing world, about which both hon. Gentlemen were worried. No doubt the bedside version of the Sunday Telegraph will contain the Minister's summing up, in which he will have to hold the balance between the two viewpoints.

The hon. Member for Hertford and Stevenage harked back to the gold standard of the 1920s. What has happened in this country has indeed harked back to the economic policies that accompanied the gold standard at that time, particularly the return in 1925 to an overvaluation of the exchange rate, which in essence was the same as the policies of this Government—an over-valued exchange rate, which places the burden of becoming competitive again on industry particularly wages and workers, causing a domestic contraction, which spreads out to the rest of the world.

It is unreasonable to blame the International Monetary Fund for these problems. It is also unreasonable to place the blame on floating. Floating the exchange rates was a response to the particular problems that developed from the disequilibrium in the early 1970s. It was a natural response to that disequilibrium. Industry in this country can live with that situation. The real problems is not, and has not been, floating. The real problem is over-valuation of the exchange rate, caused by the fact that the exchange rate has been used as a central weapon in the Government's economic management. It has been used to discipline industry, causing a depression which has been worse than that of any other advanced industrial country.

Thanks to the use of the exchange rate as a means of discipline and the revival by this Government of the economic orthodoxies of the 1920s, the United Kingdom has led the advanced world into a depression. We have fallen deeper into that depression than any other country, because we have pursued the economics of Lincoln's Inn, instead of the economics of expansion, growth, or one world. This Government's policies are dictated by lawyers, not economists. They use depression as a discipline and then blame the IMF and international institutions and arrangements for the effects of those policies on the developing world.

It is quite unreasonable to blame the IMF in that way, because the IMF represents the views and the orthodoxies of the advanced world and imposes them on the developing countries, the newly industrialising countries. I know from my experience of the recent Commonwealth Parliamentary Association delegation to Tanzania and Uganda that the IMF is regarded as "His Master's Voice", speaking for the orthodoxies of the advanced industrial countries, particularly those of the United States, which closely mirror those of our Government.

The real problem is not the IMF and its management of international liquidity. The real problem is the contraction of the developed economies. We in this country are responsible for starting that contraction and for having prolonged it further and deeper than any other country. The Americans began to pursue the same policies and pursued them with perhaps an almost equal degree of insanity, but they then found that the policies were proving disastrous, not only for domestic industry, but for the developing world. It was partly because they were more politically sensitive, but also partly because they were more aware of their obligations to the developing world and the newly industrialising countries, that they began to reverse those policies last year with a huge expansion in the money supply and an increase in deficit financing to counter the depression. Our Government have persevered with their policies, congratulating themselves all the time on their courage and resolute approach to other people's jobs and the future of firms, even though they are inflicting enormous damage.

The International Monetary Fund has been deliberately held back from doing what it can and should do to expand liquidity in the developing and newly industrialising countries. It has not been provided until now with the resources to do the increasingly difficult and expensive job for which it was designed. Even now the increase in its resources is inadequate. Therefore, it was no wonder that the private banks, the commercial banks and the trading banks of the world began to step in to fill the gap created by the failure of the developed countries to provide finance for the IMF.

We can hardly blame the banks for stepping in to redress a failure which was the responsibility of the Governments of the advanced nations, such as ours. Because the banks stepped in to do what the IMF was no longer able to do, namely, recycle the Arab oil money, they kept the economies of the developing and newly industrialising countries going at a higher level that they would otherwise have been. In the main they financed expenditure which was fruitful and beneficial. It went mainly into investment and expansion. The effects of that washed back on to us. That expansion in the newly industrialising countries and in the less developed countries helped sustain activity here, so we got the benefit from it. Thus it is unreasonable to blame the banks for keeping those economies going during that crucial period.

That benefit was sustained until the massive contraction began in Western economies, and particularly in our economy, because we led the way into the contraction. Inevitably, that contraction had disastrous repercussions for the developing countries, because the prices of the primary products on which they depended to support their rising populations were depressed by the condition of the world economy and particularly of our economy.

In Tanzania and Uganda there were constant complaints that the prices of their coffee, tea, cotton, cloves and everything else were depressed by the way in which we ran our economy and particularly by the failure of the entire Western economy, including the American economy, to keep going at a time when it was vital that we maintained some expansion to sustain their economies. We were beginning to hold them back. We were responsible for the depression spreading to their economies.

So the burden was felt by our people, on whom depression was used as a means of social discipline and of keeping down wage demands because people were so scared of losing their jobs that they did not demand wage increases. The depression was spread much further out into the developing countries on whom we imposed the same discipline by depressing the prices of their primary produce and by cutting the amount of aid we were giving to keep them going in the face of the difficulties. That was symptomised by the Prime Minister's view of aid as handouts. That was her view of what we were doing to help the developing countries. That attitude justified the cuts in aid that were supplementing and compounding the problems that we were causing those countries by the weakness of our demand for their primary produce. We hit them when they were least able to bear it.

In Tanzania and Uganda we learnt on that Commonwealth Parliamentary Association delegation the consequences of our folly. We found that those countries' industries that depended on overseas exchange, which was crucial to keep them going, were gradually running down because the overseas exchange was not available. An east African tyre factory, for instance, had not produced a tyre since 16 October because the overseas exchange was not there to buy the rubber and the components for the tyres. All the workers were laid off. As a result, their purchasing power was no longer going out into the economy. There were foundries with three days' supply of coke to keep going. There were hospitals unable to buy drugs or the equipment to keep them going. Primary producers were unable to get their primary produce transported to the markets because the fuel was not there, because the economy could not purchase the fuel.

That is largely the fault of this country. It has followed from the depression that has been engendered by the Government and the backwash of that depression on to developing countries, yet, now we have the spectacle of the hon. Member for Hertford and Stevenage blaming the IMF for a situation which his Government have largely produced by contractionary and deflationary policies for our economy. That is what is happening in the developing world.

The IMF, in so far as it has any blame, is to blame only for reflecting the economic orthodoxies that have motivated our Government and, for a more limited period fortunately, the Government of the United States of America. The prescriptions that the IMF is imposing on those economies as a consequence of our measures are prescriptions of devaluation and placing the sacrifices of that devaluation on the workers to increase the purchasing power of the farmers and the rewards of the farmers to stimulate their activity. It is a prescription that some will accept because they are desperate—Uganda has accepted it. It is a prescription that others will resist because they have a greater concern for political stability in their country and the well-being of their people, as Tanzania is resisting it. However, it is a prescription that compounds the problem, because it heightens the economic difficulties that those countries face.

The only solution is a collective expansion of the world economy. It is not to blame the IMF. It is to expand the world economy together so that our demand for other countries' primary produce goes up and so that they are able to expand their economies with ours and with their expansion begin to purchase more of the manufactured goods with which we are so anxious to supply them.

We cannot run a world economy on the basis of Friedman for the developed countries and Keynes for the less developed countries. It is impossible to run it like that. We must expand together and recognise that we are one world and that our fate is dependent on theirs, just as they are dependent upon us. Our responsibility is not only to our people and to provide jobs and well-being for the mass of working people in this country, but to expand our economy so that the benefits of the expansion wash overseas to those far poorer than ourselves who need that expansion more desperately than we do and whose standard of living and ability to support their rising population depend on our purchase of their products and therefore on the expansion of our economy.

Therefore, it is not only a question of institutions such as the IMF but a question of political will in this country and in the United States so that we can move together towards the only solution that will benefit those countries over the long term.a collective expansion of the world economy to benefit our people as well as theirs. In short, it is a question not only of institutions, but of our sense of responsibility towards a world for which we have long been responsible. We need to recognise our responsibilities, because of the disastrous effect of our contraction on the world.

12.15 am

The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)

I congratulate my hon. Friend the Member for Hertford and Stevenage (Mr. Wells) on initiating what has proved to be a wide-ranging debate. I dare to think that the debate has made up in quality what it has lacked in the convenience of the hour for hon. Members. It is not easy to pull together the threads and respond adequately to the wide range of contributions.

It would be fair to say that, if there has been a common theme, it is that of a common distaste for the system of floating exchange rates—or at least the way in which it has been operating. When we moved to that system in the early 1970s, I was not one of those who believed that it was some sort of secret elixir to enable us to achieve almost continuous growth. It was a fashionable view, but I did not subscribe to it. I suspect that, as my hon. Friend said, the system would hold in store steadily accelerating inflation. But having said that, I must confess that I have always believed that it is a great deal easier to slip the moorings of a system of controlled exchange rates, as we did at the beginning of the 1970s, than to put the boat back on to the pins.

There have been a number of suggestions from hon. Members about how we might seek to bring more order into the internal monetary system. My hon. Friend, slightly echoed by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), was enamoured of the idea of a new Bretton Woods. It has been said, perhaps not unfairly, that that demand resembles the attitude of someone clambering into a taxi without knowing his destination. A taxi may be a useful vehicle, but one needs to know where it is to take one. It is not entirely clear where those who call for a new Bretton Woods would wish to take the system.

The success of the original Bretton Woods, and the system established in the post-war world, depended essentially on the acceptance of the dollar as an international numeraire. The system worked while the monetary policies of the United States justified the tacit acceptance of the crucial reserve role of the dollar—that is, until the American Government chose to finance the Vietnam war by printing money. At that stage confidence in the dollar as a numeraire collapsed and with it, effectively, the Bretton Woods system. There is no evidence of a generally acceptable international numeraire today.

My hon. Friend the Member for Hertford and Stevenage argued the case for gold. I used to be a bit of a gold buff myself at one stage. I think that it came from living and working in France at a time when de Gaulle had returned and turned gold into the great certainty of the international system. I thought that the system had something to commend it. Then I returned to Britain and shortly thereafter, unfortunately, the right hon. Member for Cardiff, South-East (Mr. Callaghan) proceeded to dissipate Britain's substantial gold reserves. Ever since then I must admit that gold has seemed to lose some of its glitter.

We must recognise that the return to the certainties of the gold standard, such as they were—perhaps they were exaggerated—would distribute its benefits very haphazardly, tremendously to the advantage of France, South Africa and the Soviet Union, and tremendously to the disadvantage, as things stand at present, of countries such as the United Kingdom, which has never managed to repair the ravages of the gold content of its reserves perpetrated by the right hon. Gentleman in the 1960s. In any case, it must be said that there is no evidence of an international consensus leading to the acceptance of gold as the new basis of an international system.

The right hon. Member for Ashton-under-Lyne appeared to have no patience with the gold proposition—if I may put it that way—and argued for a policy of more extensive intervention. I was a little surprised to hear that. I should not have thought that our experience with intervention in recent years has been particularly encouraging. We have only recently had the example of France spending thousands of millions of dollars of mainly borrowed money in an attempt to sustain a particular position in the European exchange rate mechanism. In the end, as we have seen in the last few days, it has been punched off it again for the third time. The experience of Britain, Germany and France over the years shows that intervention on its own will not massively transform the movement of major currents of opinion in the international exchange rate system.

Mr. Austin Mitchell

What about interest rates?

Mr. Bruce-Gardyne

Clearly, substantial movements in interest rates of a differential nature can have an effect on the course of exchange rates. That is indisputable. But even now I would argue that other factors are liable to have a far greater significance. I should argue that in the past three or four years by far and away the biggest short-term influence on sterling exchange rates has been changing fashions in the view taken of the value of substantial oil reserves. Between 1979–80 it was regarded as the sort of ultimate jewel in the crown to have substantial oil reserves and sterling's international value reflected that assessment. Today, the international perception of the value of oil has changed dramatically. This has, obviously, had a substantial impact—I do not say that is the only one—on Britain's exchange rate.

Mr. Robert Sheldon

No one will doubt that the presence of oil and the much increased exploitation of oil, especially the export of oil, had its effect upon the exchange rate. In the period the hon. Gentleman is talking about, interest rates went up to 17 per cent.

Mr. Bruce-Gardyne

Of course I accept that differential movements in interest rates can have an effect on exchange rate movements. As the right hon. Member knows very well, the reason for the rise in interest rates was the need to recover the grip on monetary policy which his right hon. Friend the Member for Leeds, East (Mr. Healey) had let slip and relaxed in late 1978 in the hope that would win him an electoral bonanza—which, alas, from his point of view, it failed to do.

I suggest to the House that the capacity of individual Governments, even perhaps in concert, to achieve a significantly greater degree of exchange rate stability by taking thought together is somewhat limited. One of the factors which the right hon. Member for Aston-under-Lyne tended to underplay in his comments in this respect was the enormous importance of such factors as leads and lags within the operations of multinational companies. Those factors alone, as the right hon. Gentleman knows from his experience, can have a significant or even dramatic effect at different times on exchange rate parities, and even under a regime of exchange controls.

The Government accept that a return to greater exchange rate stability would be enormously desirable from the point of view of international trade and the recovery from the international recession. The extent to which that is in the gift of Governments should not be exaggerated.

Mr. Hooley

I would not say that it is within the gift of Governments, but while Governments refuse to take any serious control over the massive shunting of huge footloose sums of capital across the exchanges and abandon any attempt to control that, then, of course, they cannot control the exchange rates. That is the key factor.

Mr. Bruce-Gardyne

It is easy to exaggerate the extent to which these movements are in the control of Governments. I remember very well the moment when the Labour Government got into great trouble in 1976, and the right hon. Member for Leeds, East had to come hopping back from Heathrow. Mr. Len Murray made a statement, saying: "We have got to get a grip on these international speculators who are attacking and undermining our currency." One of the major movements, as all hon. Members knew at the time, was the decision of the Nigerian Government to withdraw its entire reserves from London, for reasons which the Conservative party well understood. What was Mr. Len Murray proposing we should do—send in the gunboats and seize the Nigerian reserves? The truth of the matter is that these capital movements are not by any means under the control of national Governments to the extent that is sometimes argued.

The great volatility of exchange rates, which reflected the existence of massive footloose capital funds in the late 1970s, was to a considerable extent a factor in a period of rapidly accelerating inflation. The other element, of course, was that as a result of the first oil shock, a few oil producers in the middle east had resources that they were unable to spend and which they were not prepared, for what seemed to them good and sufficient reason—not unconnected with the level of international inflation—to invest long term. That situation has, of course, changed considerably. Those massive surpluses have evaporated. We are returning to a period of much more stable prices internationally.

For that reason, I would be more optimistic, on balance, than some hon. Members about the likelihood of our moving towards a period of greater stability in international exchange rates. For the same reason, I am somewhat more optimistic than some hon. Members about the likelihood of our being able to build on the modest recovery in the world economy that we have already seen.

I agreed with the right hon. Member for Ashton-under-Lyne on one point, and that is why I picked him up on it. One of the great threats to that recovery is undoubtedly the pressures of protectionism. Therefore, I was particularly glad to hear the assurance that he has given the House. I hope that the national executive—or whatever that great body is called—will endorse the supposition that the Labour party shares our determination to resist all the calls for the erection of trade barriers, which would be disastrous for this country as a major trading nation. Therefore, I was glad to hear the right hon. Gentleman's reassurance and I hope that it will be endorsed by the whole of his Front Bench.

Mr. Austin Mitchell

One thing that we can heartily endorse is that a Labour Government will not use unemployment as a means of protectionism in the way that this Government have done. They have used unemployment as a means of cutting demand in the economy, especially for imports. As this Government have led the world economy into a depression—we went in harder, deeper and earlier than any other country—will they now set an example and, by expanding the market, lead the world economy out of it?

Mr. Bruce-Gardyne

To some extent we are moving ahead of the international economy, and the evidence for that is already accumulating. However, I was amazed by the hon. Gentleman's impression of the significance of the British economy in international terms. He reminded me of when Lord Kahn came before the Public Expenditure Committee several years ago and explained that all world inflation was due to the activities of some Amsterdam burghers in the early 1950s. As the Duke of Wellington used to say, If you believe that you will believe anything. However, we witnessed a steadily expanding rate of inflation throughout the 1970s, which was bound eventually to burst. It is essential that we should adjust and return to much more stable prices. We are moving in that direction. We must build on the progress that we have made.

My hon. Friend the Member for Hertford and Stevenage asked about the Treasury's view of the American approach to such problems. It is similar to ours. The American Government also share our view about the crucial importance of the need to secure sufficient and effective adjustment policies in countries that have run into acute indebtedness, to manage the steady downward movement towards more stable prices, and to achieve a steady convergence of economic performance and policies, particularly by those countries whose currencies form the special drawing right about which my hon. Friend expressed such measured scepticism.

I agree with my hon. Friend that SDRs have hardly lived up to their author's expectations. Nevertheless, I believe that they have come to hold an acceptable place in international reserves particularly since they were concentrated on five main contributor currencies whose Governments, including ours, have an obligation in this context to pursue coherent and responsible financial and monetary policies.

In short, I tend to doubt whether there is a magic formula—be it gold, SDRs or what is loosely and rather meaninglessly described as a "new Bretton Woods"—which can take the place of the common pursuit of more stable prices and monetary and fiscal disciplines by sovereign Governments. Exchange rate volatility and high real rates of interest are hazards to international trade and industrial recovery. However, I suspect that they are the inescapable legacy of a period of high inflation.

As that period recedes and confidence in the value of domestic currencies revives, provided that Governments restrain their Budget deficits to levels which are compatible with domestic savings, which is crucial, as we see from the experience of the United States today, interest rates should moderate, the problems of sovereign debtor countries should become more manageable and exchange rate fluctuations should return within acceptable bounds. That is certainly the Government's objective and perception. I believe that it is today widely shared around the world.