HL Deb 05 July 1937 vol 106 cc12-36

Order of the Day for the Second Reading read.


My Lords, the object of this short Bill of two clauses is to increase the resources of the Exchange Equalisation Account by £200,000,000. As your Lordships are no doubt aware, the Account was set up in 1932, shortly after the National Government came into office, under the Finance Act of that year, with borrowing powers of £150,000,000, and in 1933 these powers were enlarged by the Exchange Equalisation Account Act to £350,000,000. It is now proposed four years later to bring the total up to £550,000,000. The purpose of the Account, as has been explained on previous occasions, is to smooth out variations in exchange rates or, in the words of the Act which established it, "to check undue fluctuations in the exchange value of sterling." It does not attempt to alter any long term, deep-seated trends in exchange rates, if such should develop. What it aims to do, and I think I can claim it has succeeded in doing, is to provide reasonable stability of the exchanges from day to day.

The most obvious fluctuations to be guarded against are those resulting from day to day changes and anticipations and, in particular, seasonal considerations. The pound is normally higher in the spring and lower in the autumn owing to the importation of very large quantities of goods during the autumn months, and this process, normal in itself, might be seriously intensified by speculative transactions. But there is a more serious form of fluctuation which also needs to be counteracted. This is the fluctuation that results from a deliberate shifting of large quantities of capital from one centre to another. Great quantities of short-term funds which their owners can call upon at any moment are accumulated in the main financial centres and are liable, under the influence of temporary distrust, or indeed by way of mere speculation, to be shifted suddenly from one centre to another. Such movements have little to do with the ordinary settlement of international trading balances and are in any case quite out of proportion to the amounts required for that purpose. The money is sometimes described as refugee capital and the more stable and flourishing any particular centre is the more it is liable to be embarrassed by a large influx of this refugee capital. Such temporary move-merits, if left unchecked, would produce fluctuations in the exchange so large as seriously to hamper ordinary trade, converting much of it into a gamble, and it is essential that effective steps should be taken to neutralise their bad effects.

A further reason for the expansion of existing powers in this way is to be found in the Tripartite Monetary Agreement entered into last September with the United States, France and ourselves. The object of this policy, as your Lordships are aware, is to maintain equilibrium as far as possible in the system of international exchanges. If we are to pursue that policy, which is, I think, almost universally approved, we must inevitably from time to time purchase gold. It is quite impossible to avoid at the same time both addition to our gold holdings and wide fluctuations of exchange rates. Some considerable expansion of our available resources is therefore necessary if we are to pursue the policy embodied it that Agreement.

There bas been in the past considerable criticism made from time to time of the secrecy of the Account's operations. In the opinion of my right honourable friend the Chancellor of the Exchequer and His Majesty's Government the necessity for day to day secrecy remains undiminished, because if the daily workings of the Account were common knowledge they would undoubtedly accentuate those very speculative tendencies which it is the object of the Account to check. But His Majesty's Government quite realise that it is natural that Parliament and the public should wish to be informed of the general position of the Account, and the Chancellor of the Exchequer has come to the conclusion that a statement in regard to its resources each half-year can safely be published three months later, that is to say, at the end of June and at the end of December. In accordance with this conclusion it has already been announced by my right honourable friend in another place last week that the gold actually held in the account on March 30 this year, three months ago, was 26,674,000 fine ounces and that held in the Issue Department of the Bank of England was 73,842,000 fine ounces. This makes a total of 100,516,000 fine ounces and at the price of £7 an ounce represents just over £700,000,000. My right honourable friend I think added at the time that at the same date the Account held no more than a trifling amount of foreign currency. I may add that although the primary object of the Account is not to make a profit, the Chancellor of the Exchequer was able to state once more, as has been done before in previous debates, that the Account still showed a profit.

I do not think your Lordships will require me to say much more in commending this Bill to you. It is a very complicated subject and I have no doubt that an interesting debate will arise, after which I will try to answer any questions that may be asked. I may claim that it is universally recognised that in present circumstances an Account of this kind, of which we were pioneers, is essential; that if it is to exist at all and operate successfully its resources must be ample, and nothing could encourage more that speculation which it is the object of the Account to defeat than the suspicion that this was not the case. In conclusion I would say that this is a certified Bill under the Parliament Act. I beg to move that it be read a second time.

Moved, That the Bill be now read 2a.—(Lord Templemore.)


My Lords, the noble Lord in moving the Second Reading of this Bill has done so in a speech of clarity and brevity, although it was not as informative in certain respects as I should have liked it to have been. I would like to emulate his clarity and brevity, but it is rather difficult to do that because the Bill is one of great complexity as well as one of great importance. The Bill passed through another place without a great deal of criticism and I have no doubt it will pass your Lordships' House without difficulty. Nevertheless it is a Bill which I think is bound to give rise to certain misgivings, and I propose to voice some of those feelings, speaking for my noble friends on these Benches although without binding them to every syllable of what I say.

As the noble Lord explained this Bill asks Parliament for a further £200,000,000 for the operations of the Exchange Equalisation Account. Added to the previous figure of that Account of £350,000,000 it means that we shall have reached a total of £550,000,000, which is an amount not far short of the pre-War National Debt. Therefore we are getting into big figures; and there is no guarantee that this £200,000,000 is the end, or that sooner of later—and I dare say sooner rather than later—the Chancellor of the Exchequer will not come to Parliament wanting further money for this Account, another £200,000,000 or £300,000,000, whatever it may be. I say that especially having regard to the now very large and increasing output of gold. The noble Lord has told us, as the Chancellor of the Exchequer did in another place, that there is a profit on the Account. That is, of course, only a paper profit. There is no realised profit on the Account, and it is impossible to say whether, when the Account is finally wound up, there will be a profit or there will not be a profit. To put it in another way, whether eventually there is a profit or not depends upon the rate at which the United States, or France, or Great Britain stabilises its currency. If America does not alter the present gold content of the dollar, the price of gold here will fluctuate with the exchange between this country and the United States. It remains, I repeat, to be seen whether in the end there is a profit or a loss.

We have been told by the noble Lord and by the Chancellor of the Exchequer that this subject is a very complex one—in fact, so much so that the Chancellor of the Exchequer almost suggested that nobody really understands it. I dare say that is more or less true, but that is no reason why we should not try to understand it better than we do, and to have better information in certain regards than at the present time has been furnished to us. This is the time for getting information. This is the Second Reading of the Bill, and it is in the—as I think—quite legitimate and, indeed, commendable endeavour to obtain certain information that I am going to ask the noble Lord in the course of my speech a few questions. I have given him notice of one or two of those questions; perhaps not all, because this Bill is being hurried through Parliament. If he is not able to reply to all the questions to-day, I have no doubt that with his customary courtesy he will do what he can at a later stage, probably on the Third Reading of the Bill. That would give him time to consider the matter. It would be quite unreasonable to expect the noble Lord to deal with very technical matters like these without some notice.

The first main question I want to ask is this. Is this Exchange Account being used only for the purposes for which it was originally intended, or have its operations gone beyond that? The noble Lord has said—and he is quite right, because it is laid down in the Finance Act, 1932, where this Account was set up—that its purpose is to check undue fluctuations in the exchange value of sterling. My submission is that the operations of the Account have really gone and are going beyond that, and that it cannot now be said that the Exchange Account is only being used—to employ the phrase which has been current in this connection—"to iron out small fluctuations in the exchanges." It has, in fact, been largely used to help the franc. Before the franc was devalued, and again recently, it has been used, as the noble Lord has said, to work the Tripartite Agreement, the Monetary Agreement of last September between the United States, Great Britain and France. And, as the noble Lord indicated, the operations of the Account have led to an enormous increase in the country's holding of gold.

Now that may or may not be right, but the question is: Is it what Parliament intended? In practice the Exchange Equalisation Account has been operated in a way which has become a backdoor return to what is really a new kind of gold standard. Shortly, we are now, in effect, measuring our currency by gold. What is the position? The American exchange is based on gold, and if the British exchange is being kept steady, as the noble Lord indicated, by the Exchange Equalisation Account with the American exchange, then in effect Great Britain's currency is also being based on gold. Then, as I will show later, the Exchange Equalisation Fund has been used to reduce the fiduciary note issue, and if—which is at any rate theoretically possible—the fiduciary note issue were wiped out altogether and at the same time our exchange were kept steady with the American exchange, which is based on gold, then we should really have sterling based on gold. In those circumstances it is surely not an exaggeration to say that we should have gone back to what would be in effect, de facto, a gold standard.

Obviously, this kind of policy which I have been indicating may suit very well those who would like this country sooner or later to return the gold standard, but I think that it is a matter which wants very careful scrutiny by Parliament. I am not now discussing whether this country ought sooner or later, or ought not, to go back to the gold standard. The point I am making is that certain operations of the Exchange Equalisation Account might appear to be paving the way for the return to the gold standard. The question, I say again, is: Is that the intention of Parliament, and was it for any such purpose that the Fund was created? Surely the reply to that question is in the negative.

Is it going too far to suggest that the operations of the Account are going beyond the objects stated when the Fund was set up, and beyond the words of the Statute upon which it is based, those words which the noble Lord quoted—namely, "to check undue fluctuations in the exchange value of sterling"? In the years before Great Britain went off the gold standard the dollar was at 4.86 and the franc, after stabilisation, was at 125. As we know, in that period this position proved to be a costly matter to Great Britain in its export trade. Sterling was over-valued and the franc was under-valued. To-day the dollar exchange is 4.96 and the franc exchange is probably somewhere about 128. Now, I want to ask the noble Lord whether the Government are satisfied that such a change has taken place in relative price levels as to give assurance that, at these present rates of the American and French exchanges, sterling is not still overvalued; because if that were so, it would, of course, be to the detriment of our export trade. That is the first question, of which I have given the noble Lord notice, and no doubt he will be good enough to give a reply.

The second main consideration which I wish to put before your Lordships is this: Is the Exchange Equalisation Account being actually worked in accordance with the law or, as I have indicated, with the intention of Parliament? Look at this matter of the country's total gold holding. The noble Lord has given the figures, just as the Chancellor of the Exchequer gave the figures in another place. If you add £186,718,000, in respect of gold at £7 per fine ounce held in the Account: on March 30 to the £,516,894,000 in respect of gold at £7 per fine ounce held in the Issue Department of the Bank of England, you arrive at a total of about £703,000,000; at any rate over £700,000,000 as the noble Lord said. Very well. In 1932 when the Exchange Equalisation Account was set up, the gold holding of the country was very much smaller. The amount in the Issue Department of the Bank of England was £130,000,000 taking gold at £4 4s. 11½d. per ounce. If that gold be valued up to £7 per ounce, it will come out at a value of £217,000,000 That would be the value of the gold which was in the Issue Department of the Bank of England in 1932, taking it at to-day's price of £7 per ounce. Now if, to that figure, you added the £350,000,000 worth of gold, assuming that all the Exchange Equalisation Account's money has gone in the purchase of gold, you would arrive at a total of £567,000,000. But as I say, we are told that we have actually an amount of £703,000,000. Therefore there appears to be an excess of £136,000,000 over the figures which I have just given to your Lordships. It is quite true that some part—not a very large part—of that excess would arise because a certain amount of gold has been bought at a price below £7 per ounce, and you have to take that into account. But, taking everything into account, it would seem that the Exchange Equalisation Account has bought gold to a considerably greater extent than £350,000,000, which is the nominal figure of the Account. It may be that the Exchange Equalisation Fund has bought gold to the amount of over £450,000,000.

Now consider a little more in detail, because there is one transaction which we know a good deal about. A very great deal about this Bill is buried in mystery, and nobody knows anything about it except the potentates who sit at the Treasury; but we know that there was a specific transaction last December about which the facts are more or less known. Last December the Exchange Equalisation Account bought gold worth £108,000,000, I suppose at £7 per ounce, and passed it to the Issue Department of the Bank of England at £4 4s. 11½d. per fine ounce. As your Lordships know, the Bank of England cannot pay more for gold—that is, in its books—in the Issue Department Account. Now the amount which the Exchange Equalisation Account received from the Bank of England for this purchase of about £108,000,000 was about £65,000,000, because the Bank of England only paid the Exchange Equalisation Account at the rate of £4 4s. 11½d. per ounce for the gold, for which the Exchange Equalisation Account had paid £7 per ounce.

We arrive at this position. The Exchange Equalisation Account had already spent £108,000,000 of its assets in buying gold, but was furnished by the Bank of England with another sum of £65,000,000, with which it could buy more gold. That is the point which I wish to impress upon your Lordships. It would seem—I am asking for information, as to whether this is correct—that the limit of the Exchange Equalisation Account's capacity to buy gold is not that of the nominal amount of the Account. It would seem that this figure might be increased from time to time, if it were all done in that way, by not far short of two-thirds of this total, if all the Exchange Equalisation Account's assets are used for the purchase of gold, which is passed to the Bank of England at £4 4s. 11½d. per ounce, and then the Bank of England pays the Exchange Equalisation Account for the gold bought, at £4 4s. 11½d. per ounce. Quite obviously the Exchange Equalisation Account is going to have far more assets which it might spend, and appears to have spent far more than the nominal amount of the Fund.

Apply that to what we are asked to do this afternoon. We are asked to authorise a further £200,000,000 for the Exchange Equalisation Account. If that £200,000,000 be all used for the purchase of gold at £7 per ounce, it will buy somewhere about 29,000,000 ounces of gold. If, in due course, that gold is passed on to the Issue Department of the Bank of England at £4 4s. 11½d. and the Bank of England pays the Exchange Equalisation Account for the gold bought at the rate of £4 4s. 11½d. per ounce, the Exchange Equalisation Account will receive a sum of rather over £120,000,000. For simplicity's sake we will call it £120,000,000. With that sum the Exchange Equalisation Account can buy about another 17,000,000 ounces of gold at £7 per ounce. Thus, with this £200,000,000 which we are being asked to authorise this afternoon, it would seem, if I am right, that the Exchange Equalisation Account may buy as much as £320,000,000 worth of gold. The £200,000,000 might, supplemented in the way I have described, come to £320,000,000, and that might possibly all be spent in the purchase of gold. So, if that is right, what your Lordships are asked to do in fact is to give power to the Exchange Equalisation Account to buy gold, not only to the limit of £200,000,000, but to a limit of about £320,000,000, with of course a proportionate increase in the risk—this great gold holding at the price of £7 per ounce which is a very high price compared with what the price used to be. In short, the Exchange Equalisation Account may have bought, with what your Lordships are authorising this afternoon, about 46,000,000 ounces of gold at £7 an ounce instead of only about 29,000,000 ounces of gold. I want the noble Lord to tell your Lordships, either to-day or tomorrow, whether what I am indicating may happen, and whether there is anything to stop it happening in the way in which this Fund has been worked, because I think Parliament ought to know.

There is a further point of great importance in regard to this transaction which took place last December. When this purchase of gold made by the Exchange Equalisation Account, a purchase of £108,000,000 worth, was passed to the Issue Department of the Bank of England, the sum in the Issue Department was not£108,000,000 but was £65,000,000, because, as I say, gold there has to be taken at £4 4s. 11½d. per ounce instead of £7 per ounce. When the Issue Department received that gold, valued at £65,000,000, it does not appear really to have needed the gold, but something had to be done with it or about it. As a fact what was done was to reduce the fiduciary note issue from £260,000,000 to £620,000,000. If this sort of thing has happened once it may happen again; indeed, in theory there seems no reason why in course of time the fiduciary note issue should not be wiped out altogether and replaced by god without Parliament doing anything about it.

A question was asked of the Chancellor of the Exchequer in another place about three weeks ago. He was asked whether in order to ease the gold difficulties he would reduce the paper cover held against the note issue by replacing the £200,000,000 of fiduciary paper with gold coin and bullion from the Exchange Equalisation Account until the whole of the note issue had been covered by gold at 85s. per ounce, pending revaluation. The Chancellor of the Exchequer said: It is not necessary to consider this proposal at the present time. That is not very reassuring. It does not rule it out apparently. He says it is not necessary to consider the proposal at the present time. In those circumstances it does not appear to be fantastic to suggest that the fiduciary note issue might in time go altogether. Of course, if that should happen it would be very much easier to make out a case for the return to the gold standard because then there would be no fiduciary note issue, and the Bank would have gold against notes pound for pound.

Before I sit down there is one question which I want to put to the noble Lord in the endeavour to elucidate the position, so that we may know what is going on. I ask the noble Lord if he will be good enough to reply to this question, probably to-morrow. The question is this: Does the Issue Department have gold bought for it through the Banking Department or through any channel other than the Exchange Equalisation Account? If the answer is Yes, does the Exchange Equalisation Account—


May I interrupt the noble Lord? I am exceedingly sorry, I did not quite catch the first part of his question.


I will give the noble Lord a copy of this question. I did not expect him to follow it, it is too technical. But if the answer is Yes, does the Exchange Equalisation Account hand over immediately gold or securities for the difference between £4 4s. 11½d. and £7 per ounce? If the Exchange Equalisation Account does not hand over the difference, but is debited by the Bank of England with the difference, is not the effect to leave more funds in the Exchange Equalisation Account for more purchases of gold and so forth than if the difference had been made good by the Exchange Equalisation Account immediately? Also, if the difference is not made good immediately, how can this be reconciled with Section 25, subsection (3) of the Finance Act of 1932, which begins with the word "Whenever"? I will not take up time in expatiating on that question. When the noble Lord receives it he will realise its significance and what I mean by it, and I should very much appreciate a reply, which, I take it, he will be good enough to give to-morrow.

I do think, in conclusion, that I am not going wrong in uttering a note of warning. I suggest that we must not necessarily accept the decision of the Chancellor of the Exchequer in this matter as sacrosanct. His decisions are made on expert advice, but unfortunately that advice has proved to be wrong on more than one occasion in dealing with these matters of gold and currency since the War. I remember Mr. Churchill, who was Chancellor of the Exchequer for some time, saying, "I am not a currency expert, and if I said I were nobody would believe me." Years afterwards he said in effect, in regard to the advice which was given to him about the return of this country to the gold standard, that that advice had proved to be a mistake. And again we remember the woeful predictions about what was going to happen in 1931 if the country was forced off the gold standard. We were forced off the gold standard, and in a very short time the vast majority of people were saying what a good thing it was, and that we must be very careful about going back to it. So I say, having regard to past experience, we must not necessarily assume that the decisions of the Chancellor of the Exchequer, though no doubt made with the best possible intentions on what he deems to be the best advice, are sacrosanct. The advice which has been given has been wrong before, and it may be wrong now—I am not saying it is wrong; but I have endeavoured to indicate to your Lordships why I think this Bill is one of importance and ought to be very carefully scrutinised before it passes.


My Lords, may I ask your Lordships' permission to say a few words on a Bill which the noble Lord opposite, Lord Arnold, has described as one of great complexity? I feel some diffidence in addressing your Lordships' House for the first time, and if I stray beyond the rules of order I am sure I have only to ask for your Lordships' forbearance and that you will put the most favourable interpretation upon my words. I do not propose to follow the line taken by the noble Lord opposite, because he looks at the problem rather from the standpoint of an accountant and of one who has mostly thought of the matter in terms of finance. I look at the matter from the standpoint of thirty or forty years' connection with manufacture, the turning of raw material into manufactured goods and selling them abroad. But I think the noble Lord, Lord Arnold, is quite right when he says it is very difficult to analyse what this all means. I have in my private capacity endeavoured to understand the intricate problems of exchange. It was my duty, when Minister of Overseas Trade and afterwards at the Treasury, to do that also for public purposes; but the longer I study the matter the more I feel I can know nothing about it. To analyse the effects of this Bill in this House this afternoon and get down to the integral factors on which it is based would be like trying to pour the Atlantic and Pacific into a tea-cup. No man can tell the tangential effects of interference with exchange.

The noble Lord has told us that the amount we are dealing with is about £550,000,000. It is bigger even than that. There was also the £25,000,000 taken out of the dollar exchange reserve. The amount really appals me. I hardly dare to trust my mind to think of it in case I say something or imply something which may be subject to misinterpretation. All I have learned from my study of exchange is this, and I make a reservation if Free Trade is urged against me, that Free Trade is not an analogous argument, that interference with the free play of the laws of supply and demand, whether it applies to pepper or to gold, will sooner or later bring disaster. I am totally against any policy of long-continued interference with the laws of supply and demand. What is this Fund meant to do? What is the basis of this Bill? I shall not go into minor details as to ounces of gold or whether £705,000,000 is involved or £704,000,000 or indeed any particular sum. That is not the point. May I take your Lordships along with me when I say that what we are really trying to do by this Bill is to dam the flow of unwanted, surfeit gold which is flowing into the currency systems of Britain and the United States? Why do we do that? Here we do not want an inflation of credit which might lead to unbridled and unjustifiable share and commodity speculation. The United States do not want a large influx of gold into their system of currency because, quite rightly, they desire that there should not be an inflation in the cost of living, which always leads to trouble and an increase in the cost of production.

The noble Lord who introduced the Bill told us what its specific aims were, but nobody in my opinion can tell us—certainly I cannot find out—what really we should do or should not do, about the gold problem, the oscillations of exchange and flight of panic money-values, because we are working entirely in the dark. We do not know the basic facts of what is actually happening. What is more, the measuring rod, the unit of value we are dealing with, is anchored down to nothing; whether it be dollar, sterling or franc it has no fixed basis. It has been well described as an india-rubber rod. We are working in the dark. The noble Lord who moved the Second Reading has repeated what was said in another place, that the details of the accounts of the Fund will be submitted to the Public Accounts Committee in order that there might be modified secrecy. I do not pay much attention, nor do I think your Lordships need pay much attention, to the effect of that disclosure. I do not know whether there are sitting in this House many of your Lordships who have been members of the Public Accounts Committee of the House of Commons. The noble Lord opposite, Lord Arnold, was, I think, a member. I sat on that Committee for years and until I resigned my membership of the other House a few weeks ago, and for two years was Chairman and for a good many years often sat as Deputy Chairman. I think I can carry the noble Lord opposite along with me, if it is said here or elsewhere that the Committee on Public Accounts will be able to look into the accounts of this Fund and discover any irregularities, when I reply very bluntly "Nonsense." It is not likely that there will be any irregularities. The devoted, conscientious, efficient public servants at the Treasury and elsewhere, helped by the experts in exchange outside, are not for a moment likely to do anything which is irregular. There will be nothing irregular discovered there. But if an irregularity was discovered, what is the good of discovering an irregularity three or six months after it has occurred? It is shutting the stable door after the horse has gone.

We are told that we are not to receive the information until three months after March 31 or September 30. There is more money to be lost by speculation in exchange than by gambling on the Stock Exchange or at the roulette tables of Monte Carlo or by buying modern French pictures. There is more money to be lost rapidly in exchange than in any other form of gambling. Let me carry the noble Lord opposite with me. The period during which the Public Accounts Committee sits to examine the matters submitted to it is from the beginning of January to about the first week in July. I do not remember sitting in July. How, then, in the name of what is reasonable is it going to be of any use to the public service that the information which has been accruing up to March 31 should be handed over to the Public Accounts Committee on June 3o, when the Public Accounts Committee has already done its year's work and is making its Report? The consequence will be that any examination will have to be deferred until the Public Accounts Committee meets again, usually in the spring, by which time more months will have passed. To describe this as a concession made to certain persons who want more disclosure is merely so much dust thrown in the eyes.

If there is an irregularity in administering the Fund it will of course be reported. But if it is a matter of policy it cannot be dealt with. I have ruled many times on that point. If it is a question of policy that is entirely ruled out. Policy is the crux. You cannot discuss policy on the Public Accounts Committee and that kills the root of the demand for a modified secrecy. Furthermore, I have not yet known of a Report by the Public Accounts Committee being- submitted to debate on the floor of the House of Commons. Therefore, I hope that the noble Lord (Lord Templemore) will recognise that it is really a waste of breath to tell us that the matter will be referred to the Public Accounts Committee.


I did not say so.


I think the noble Lord said that after March 31 certain accounts would be submitted to the Public Accounts Committee. Am I wrong?


What my right honourable friend said exactly was that the public would be informed of the state of the Fund's resources each year three months after the half year—that is, the end of June and the end of December. If I may say so, my noble friend has been rather putting up the Public Accounts Committee in order to knock it down.


Is the information then to be published in Punch or the Labour Gazette? I do not know whether I am in order, but I certainly have a recollection of a statement being made in the other House that the information would be given to the Public Accounts Committee. I do not know if I am wrong in saying that this statement has I think appeared in The Times and in the House of Commons OFFICIAL REPORT, but if I am wrong, I will apologise at once. If the noble Lord looks at the OFFICIAL REPOR1 he will find whether or not I am wrong, and whether the information is to be given merely to the newspapers or elsewhere or to the Public Accounts Committee.

Will your Lordships allow me to deal further with the underlying conditions as I see them? It is absolutely necessary that our manufacturers must have the tramline of exchange open to enable them to pay for materials bought from abroad and for receiving the proceeds of their own exported manufactures. We send out goods and sell in foreign currencies; it is impossible to carry on unless our manufacturers are afforded means of obtaining payment for their goods. Our export trade is a pivotal part of our economic life. Unless we know for certain what we have to pay in sterling for any goods and raw materials that we buy from abroad, it is impossible for us to carry on our import businesses. We must know for certain what we are going to get for the proceeds of our workmen's efforts when we export our coal and manufactured goods abroad and receive payment in foreign currencies, when we have turned those currencies into sterling.

I have never been in favour of this type of Bill or of its principles. I have spoken mildly against its ancestors on other occasions in another place. I have never welcomed its principles in form of law. The idea has been that this Fund was to be used as a fund to level out wide fluctuations of the exchanges, hut, in the long run, it does not do that. We have an immense direct and indirect trade with our very good neighbours, the French. Has it levelled out the exchange between us and them? You have only to look at the great variations in the franc during the past twelve or eighteen months to see that it has not done so. I am certain that eventually it will be found that the principle which is implicit in this Fund will do about as much good as you would do by pouring out a kettleful of hot water into the Gulf Stream in order to raise its temperature. I think the method is foolish, and, in the long run, will not succeed in achieving its purpose in regard to the exchanges.

My noble friends will have seen a skilful billiard player propelling a ball against a cushion, and will have seen it bounce off from one cushion to another and hit another ball and go into the proper pocket. There are only four sides to a billiard table and there are six pockets. There are scores of foreign currencies different from our own. They act like tangential cushions, and if you interfere with the free passage of the exchange ball as it touches any one of those cushions you never know what deflection may happen as a result of your action. For instance, go and buy a consignment of copper in Chile, and you may find that it will be paid for with a bill drawn by Shanghai for soya beans shipped from Manchuria to Hull and the bill is to be met in Hamburg. Interfere with one of those operations by means of a Fund like this, and you do not know what 'the repercussions will be. I think it is very foolish to interfere at all, and try by artificial means over long periods to iron out the hollows and hills of a comprehensive international exchange which is anchored to nothing.

The noble Lord, Lord Templemore, has said that we are now voting £200,000,000. Where is it going to end? Where is he taking us to? I looked up a speech to-day made when the then Chancellor of the Exchequer, the present Prime Minister, spoke on this same matter. He said then that he did not think he would want any more money for this Fund. That was in 1933. But now in 1937 we are told that £200,000,000 is required, or one-third of what the National Debt was just before the War. Where are we going to? We are voyaging into an uncharted sea. We may be asked again for another £200,000,000, and that will make it up to £775,000,000. The whole policy is artificial, short-sighted and foolish.

I want to ask the noble Lord three questions. The first is a simple one, and it is this: Is the gold which is brought with the Fund in Paris earmarked there and left in France, or is it brought immediately to London? The second thing I want to ask—and I think this is vital to the whole policy and argument—is: How long is America going to give 35 dollars an ounce for gold? America is now the refuge for frightened holders of gold and securities. America buys with borrowed money gold which now amounts to £2,000,000,000 sterling, and puts it away into vaults in Kentucky. How long will the American people be willing to continue to let their Government borrow to buy and receive a perfectly useless commodity—for it is perfectly useless—in return for their useful products, services and income-yielding securities? What has happened is this: America exports commodities, services and securities, and imports commodities to the extent that she will allow them over her tariff wall, services and securities, but not enough to pay for what she has exported. The result is she gets the balance in gold, and that gold, which includes some of the refuge gold of which I have spoken, she pays for by money which 311e has borrowed, and then, having got it, she puts it into a vault and cannot use it.

The Americans cannot eat it, or wear it or use it because they are not allowed to trade with it, for if they did so it might cause inflation, rises in cost of living, in costs of production which would clog the power of exporting and attract foreign imports. The business men in the United States will, sooner or later, come to the conclusion that this is a stupid and foolish game, and they will not allow it to continue when it means buying gold at 35 dollars an ounce by borrowing, and then putting it away and doing nothing with it. The change may not be imminent, but it is very probable. Already they have £2,000,000,000 worth of it, and we have under the same system bought £700,000,000. That brings me to this question. Suppose the Americans say, "We are not going to give 35 dollars an ounce for gold any longer," who, I ask, is to bear the loss upon the gold that we are holding here? And to show how little is known of the reactions and repercussions of exchange, I would remind noble Lords of this. I heard at a meeting three or four years ago in one of the rooms of this building a statement made I think by Professor Cassel, that there was a shortage of gold in the world. He has been proved to have been quite wrong about that word shortage. He also said that in fifteen years the Transvaal mines would be exhausted. He has also been proved to be wrong there.

There is plenty of gold in the world to-clay, but it is badly distributed. There is, to-day, more than there has been at any other time. The mere fact of giving gold an unnatural value has literally drawn gold out of the bowels of the earth. It has stimulated the production of gold in the Transvaal, and has drawn out the hoards of India. Already since 1931 £231,000,000 worth of gold has come from India; we never dreamed for a moment twenty-five years ago that such a total would come from there. That gold sent to us from India is the equivalent of the discovery of a new goldfield. It represents something like three or four times the annual production of the whole of the mines of the Transvaal. I am not going to dogmatise, because I do not know, but my opinion is that if the present gold price continues for a few years longer you will eventually get £500,000,000 of hoarded gold out of India and you will probably find that there was:£1,000,000,000 of hoarded gold in India in 1931. Gold has been absorbed in India since the time of Tiberius. Moreover, since the Transvaal mines were opened in 1895, gold has been absorbed in great quantities by India, often at the rate of about £25,000,000 per year, and a very good thing it has been because this absorption of gold from the Transvaal into India prevented a surfeit of gold in Europe, and a rocketing of the cost of living by currency inflation. That gold will come out of India as long as there is the temptation of 35 dollars an ounce from America. I think also-that probably the flow from South Africa will riot only continue, but perhaps increase, and also that from Russia. In Russia the volume of gold is not known, but we know that a large amount recently has come from there, and my opinion is that the total world supply of gold will increase from South Africa, from Russia; from India and elsewhere. Then we shall be faced with this question: Will this Fund and will America be willing or able to absorb this Niagara of unwanted gold as it pours in? I do not believe that even the two great nations, the United States and Great Britain, will be able to cope with it.

The noble Lord opposite made the point that this Account appears to be used to get back to the gold standard. Do not let me, at any rate, express any view as to whether we ought to get back or not. But I do say that the United States and Great Britain must make up their minds about what they mean to do. They have been dithering for six years and now with the price of 35 dollars per ounce offered by the United States they are facing the danger that they may have to Combat an uncontrollable flood of gold from Africa, India, Russia and everywhere else. We must ask whether the two countries are to continue now to buy unwanted gold at the risk of eventual loss. If we are going back to gold we ought to make up our minds and say that the United States and Britain will stabilise gold. It may be at somewhere about the present price. I do not dogmatise about the price, but the price should be stabilised soon if they are eventually going back to gold; it should be done without much delay. Otherwise they should say they are not going back to gold.

Too much has been said about the effect of a fall in the price of gold upon Johannesburg and the Stock Exchange. Why should we pay so much attention to difficulties about profits on goldmining shares? They are of less import compared with the necessity that the international tramlines of international trade should be kept open and level by a stabilised exchange upon which people can depend. For that reason we must take first into consideration what is the natural remedy. I do not know what will happen, no man can tell. Nor do I know the solution that is best and most opportune. But I rather think that the natural solution is the best solution. I am not advocating the natural solution—there may be a compromise—but thinking aloud again. I merely desire to convey to your Lordships that it seems to me that the natural solution first requires that all countries on the gold standard should wipe out consideration of the present price of gold in relation to investors or speculators in gold mines, or even the Revenues of South Africa, consideration of whether it should be 140s or 85s. I do not wish any man ill, I wish everyone to prosper, but I am not going to take into account now whether the owners of gold, or mines, or shares, should get 140s. or 85s. Then I will go to the next step and say that all countries at present on gold should come off it and join a sterling area or, as it may suit them, a dollar area. Let there be the two areas of exchange. Then Great Britain and the United States should guarantee a fixed sterling dollar rate of exchange, and maintain that with all the might and wealth in their power, and gold should be left to find its own level in the market as a commodity. That is the natural way of solving the difficulty instead of drifting on and having to find £200,000,000 or £300,000,000 a few years hence to support an artificial price for unwanted gold. In passing this Bill I desire to suggest to your Lordships that we should register our view that we should stop this drift of undecided policy and make up our minds—and we shall in any case have to do it sooner or later—as to what we really intend to do before an unexpected decision elsewhere forces our hand.


My Lords, at the outset I should like to compliment my noble friend Lord Mancroft on the great success of his most interesting maiden speech in your Lordships' House. I have had the pleasure of reading some of the speeches he used to make in another place, but this is the first time I have heard him speak, and I am sure your Lordships will all hope that he will join in our deliberations frequently in future. I am always something of an optimist and the fairly long time that I have sat on this Bench has accustomed me to viewing a situation with not too much alarm. If it were otherwise I should be somewhat alarmed at the state in which I now find myself, in having to reply to very able speeches from two financiers. I apologise to my noble friend Lord Mancroft. He would not claim to be a financier. He is a manufacturer. I will describe them as two very able men of business. If I may deal first with the questions put by my noble friend Lord Mancroft, I understood him to find fault with me for having said that the accounts of this Equalisation Fund were periodically to be submitted to the Public Accounts Committee of the House of Commons. The only reason why I interrupted him was that I thought it really was rather hard lines on me because I had not mentioned that Committee. I think the noble Lord was perhaps confusing what he thought I said with what my right honourable friend said in another place. No doubt it is right that the Public Accounts Committee are going to look into the matter, for the reason, I suppose, that they are the natural people to do so, but whether my noble friend thinks their deliberations are of any use is a matter for him.

In the course of his most interesting speech my noble friend addressed himself to this Bill to a certain extent, but I think that his remarks in a general way were an attack on the whole monetary policy of this and preceding Governments. My noble friend and your Lordships must excuse me, a complete tyro, if I do not go very deeply into that matter. My noble friend asked me certain questions, one of Which was whether gold bought in France going to be left in Paris, and another a rather long one, about the length of time for which America was going to give 35 dollars per ounce for gold. I hope he will excuse me from answering those questions this afternoon. I will consult my advisers and if it is possible to give him an answer I will do so to-morrow afternoon when the Third Reading of the Bill is to be taken.

I turn to the questions which were put by the noble Lord opposite, Lord Arnold. He was good enough to give me notice of some of his questions. With regard to others of which he did not give me notice, I can only repeat what I have just said to my noble friend behind me, that I have not got the answers now but I shall have great pleasure m trying to deal with them on Third Reading. When my noble friend was talking about the use to which the Equalisation Fund was put I understood him to say it was used to support the franc last autumn before devaluation and that it was again used in that way recently. My answer to that is that the Exchange Account is not really used to support the franc, but is used in accordance with the terms of the Statute which I quoted in- introducing this Bill, to check undue fluctuations of sterling. In pursuance of that object the Fund has to buy gold where necessary. Recent trends in regard to the franc caused an influx of gold which the Account had to buy. The devaluation of the bra to which he referred in parenthesis did not have the same effect.

Another question he asked was with regard to the value of sterling. I gathered that his opinion was that sterling was over-valued before we went off the gold standard, and that at the present day the pound is worth more in terms of both franc and dollars than it was then. He therefore asked whether there has been such a change in the relative general price levels as to prevent sterling being overvalued at these levels. I would answer, in the first place, that the purpose of the Account, and of this Bill, which add to its sterling resources for the purchase of gold, is not concerned with the permanent relation between sterling and francs and dollars. Secondly, but for the existence of the Account, sterling would at times have been temporarily over-valued. Thirdly, the question whether a particular currency is relatively over- or undervalued depends upon a number of considerations other than price levels: changes in tariffs, sufficiency of profit margins, relative figures of unemployment or activity, and wage rates. I hope the noble Lord will excuse me from saying more on this occasion than that there does not seem sufficient warrant for saying that the value of sterling is very seriously out of relation with that of other currencies at the present time. The practical point is that it might easily become so if we do not take such steps as the Bill proposes to enable us to prevent the exchange value of sterling from being unduly raised by an influx of refugee capital.

The noble Lord, Lord Arnold, then asked me a third question, which had to do with the amount of gold in the Exchange Equalisation Account, and referred to two statements made by my right honourable friend in another place. The first was to the effect that the gold in the Account on March 3o was valued at £186,000,000; the second, that gold which has been passed to the Issue Department of the Bank is valued at the old par of £4 4s. 11½d. per fine ounce and that the excess of the market value over that figure is in substance an asset of the Exchange Equalisation Account. The noble Lord, if I understand him aright, contests this second statement by reference to Section 24 (3) and (6) of the Finance Act, 1932, which he takes to mean that differences between the old par and the present market price must be made good at the time. I can assure the noble Lord that the requirements of the Statute have been properly and exactly complied with.

In the first place, I must draw a distinction between the cash assets or sterling resources of the Account on the one hand, and the total assets of the Account, which we speak of when we say that the Account as a whole shows a profit or a loss, on the other. Now my right honourable friend the Chancellor of the Exchequer stated that the Account held on March 36, taking the value at 4',7 per ounce, gold valued at 186,000,000, and a negligible amount of foreign currency. But in addition to that, of course, there were the sterling resources of the Account, which are necessary to buy gold and which it is the purpose of this Bill to increase. In considering whether at any given date the Account shows a profit or a loss, we take account on the one hand of the cash issues to the account, and we take account on the other hand not only of the gold and foreign exchange held in the account at current prices, and of its sterling assets, but also of the excess value of the gold purchased by the Issue Department since the inception of the Account.

The reason why we are entitled to do so is as follows. When the Issue Department buys gold, either in the open market or from the Account, after the date of the setting up of the Account, the effect of the statutory provisions is that the Issue Department pays only £4 4s. 11½d. an ounce and the Account pays the difference between this amount and the market price; or, taking the market price at £7, pays £2 15s. When the Account is wound up it will receive back from the Issue Department a sum, corresponding to that £2 15s., equal to the difference between the fixed value of £4 4s. 11½d. and the then market price. Thus, one of the assets of the Account has taken the form of a book entry. The Account has lost cash and its power to buy further gold is reduced, but its assets are unimpaired.

I have answered to the best of my ability those questions which the noble Lord opposite asked me about this Bill. I can only repeat what I have said, that those questions which I have not answered I will do my best to answer on Third Reading. I beg to thank your Lordships very much for listening to me for, I am afraid, an undue time, but this is a rather complicated subject. We have had a most interesting financial debate, which cannot, I think, but do good and which will show the value of your Lordships' House to the country in being able to have a debate of this kind on this subject. I hope that your Lordships will now give the Bill a Second Reading. I beg to move.

On Question, Bill read 2a; Committee negatived.

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