§ Order of the Day for the Second Reading read.857
§ LORD TEMPLEMORE
My Lords, this Bill, although it is not very long, is of a highly technical and complicated nature and I would ask your Lordships' indulgence in my attempt to explain it to you at not too great a length. I wish I had the facility in this matter of my noble friend Lord Mancroft, whom I see in his place. If I am not mistaken, the noble Lord was responsible for the original Currency and Bank Notes Bill of ten years ago, when he was Financial Secretary to the Treasury. The noble Lord has found fault with me, I am afraid, on several occasions for Bills that I have had to bring forward in your Lordships' House and I am not sure that I always came off best in those encounters. He is always fond of saying that he is a manufacturer and not a financier, but I, for my part, always listen with great awe and admiration whenever he holds forth on finance. I can only hope to-day that he will excuse my shortcomings. When he comes to speak, as I hope he will later on, he may perhaps explain to your Lordships any points—and I am afraid there may be a great many—which I may leave obscure.
If your Lordships will look at the Title of the Bill, you will see that it refers to two things: the Issue Department of the Bank of England and the Exchange Equalisation Account. I would remind your Lordships that the Issue Department of the Bank of England has its origin in the Bank Charter Act, 1844, which was passed by the Government of Sir Robert Peel. It was one of the principal Acts passed in that Session. Under that Act the issue of notes by the Bank of England has to be kept distinct from the banking business. The total of the bank notes issued is always exactly equal to the total value of the assets shown in the Issue Department's accounts. Those assets are partly gold and partly securities. The normal size of the fiduciary note issue is fixed by law, and under the Currency and Bank Notes Act, 1928, this issue was fixed at £260,000,000. Under that Act, however, the Treasury has the power to increase or diminish this total from time to time. The Exchange Equalisation Account was set up by the Finance Act, 1932, after the suspension of the gold standard. It at first provided for a fund of £150,000,000, but since that date, nearly seven years ago, there have been two additions to the fund, which 858 now stands at £550,000,000. Its purpose is, of course, to check undue fluctuations in the exchange value of sterling.
The House will probably remember that over a long period, ending with the spring of last year, there was a very large increase in the gold stock of this country. It is interesting to note that the total value of the gold in the Exchange Equalisation Account and the Issue Department of the Bank of England, taken together, on March 31 last year was no less than £835,000,000. Between April 1 and September 30 last year there was a very large exodus of this gold, to the amount of £146,000,000, which left us with £689,000,000, of which £151,000,000 was in the Exchange Equalisation Account and the balance in the Issue Department of the Bank of England. Towards the end of last year there was a considerable pressure on the exchanges against the pound, owing mainly to three causes, of which one was a good cause and the other two were not quite so good. The good cause was the repatriation of French balances owing to the increased confidence of the French in their own country and their own Government. Of the other two causes, the first was international nervousness and the second was speculation in this country. It was therefore considered desirable to transfer to the Exchange Equalisation Account, from the Issue Department, gold to the value of £200,000,000 at the old Mint price, or £350,000,000 at the current market price.
The consequential reduction in the gold backing for the Bank's note issue necessitated an increase in the fiduciary note issue to a figure of £400,000,000. That was done at the time by a Treasury Minute temporarily authorising this issue, and the Minute was laid before Parliament early this year. This increase was within the Treasury's powers, and could, indeed, have been renewed every six months up to a total period of two years. As, however, it was considered that the increase was much larger than could have been contemplated by Parliament in 1928, it was decided that legislation to amend the Act of 1928 was right and proper. That is the reason for this Bill.
If your Lordships will turn to the Bill, you will see that in Clause 1 the fiduciary note issue is fixed at £300,000,000, subject to the existing powers of the Treasury, on the representation of the 859 Bank of England, to increase or reduce that figure temporarily. The new figure is approximately the figure arrived at by deducting from the existing total note issue the value at the current price of the gold now held in the Issue Department. In Clause 2 it is laid down that the assets in future of gold and securities held in the Issue Department are to be valued at current prices, and that at each valuation any excess of the value of the assets over the total note issue then outstanding will be transferred from the Issue Department to the Exchange Equalisation Account, and conversely, any deficiency will be transferred to the Issue Department from the Exchange Equalisation Account.
The first valuation to be made will disclose a large increase, of rather more than £90,000,000, in the value of the gold in the Issue Department, because the gold is at present valued at 85s. per fine ounce and the current price is 148s. 5d. Against this, however, will have to be set a deficiency of about £9,000,000 which is known to exist owing to the depreciation of securities at present held in the Department. In Clause 3, in view of the close connection which exists between the gold in the Issue Department and that in the Exchange Equalisation Account, it is found desirable to make provision that purchase and sales of gold may take place between the Department and the Account. With a view to simplicity, and since the Account will in any case be liable to meet or benefit from changes in the value of gold in the Issue Department, it is provided that all transactions in any week shall be carried out at the price taken for the previous weekly valuation.
Clause 4 deals with two minor matters affecting the Bank's note issue. Subsection (1) repeals the long-standing obligation on the Bank to purchase gold at the old Mint price of 85s. per fine ounce. I might point out that this obligation is at present, and has been for some time, a dead letter. Subsection (2) abolishes a long-standing provision whereby notes for £5 and upwards which are issued at the Bank's branches must be made payable at the places of issue. The object of this new provision is to facilitate the distribution of the Bank's reserve of notes prior to and during any national emergency. Clause 5 is simply 860 the short title and commencement, and there is a Schedule on the last page of the Bill setting out parts of four Acts of Parliament which are repealed. I think my noble friend Lord Mancroft should be very pleased to see that it has not been necessary to repeal a single part of the Act of 1928.
That is the Bill. It is a complicated measure, but I should like to make it quite clear on behalf of His Majesty's Government, as was done in another place, that it involves no real fundamental change in the arrangement for controlling the amount of the notes which the Bank of England can issue. The provisions of the Bill are entirely matters of machinery, and the Bill is brought in, as I have said, because the Government considered it more proper to proceed by legislation than by repeated Treasury Orders. I have done my best to explain the measure to your Lordships, and if I have, as I am afraid I probably have, left anything obscure, I will do my best to answer later on any question that may be put to me. I beg to move that the Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord Templemore.)
§ LORD MANCROFT
My Lords, I think my noble friend has helped us very considerably by the lucid way in which he has explained the terms of the Bill, and I wish to thank him. This Bill covers a subject of the highest importance and of great complexity. It deals with national currency, and national currency passes through nearly every transaction of our every-day life. National currency is part of the life of the nation's activities, especially in trade, and is like the circulation of the blood in our own bodies. It is of vital importance to those like myself connected with manufacture. I think my noble friend does not appreciate the weight that I put upon that distinction. But being connected with manufacture rather than finance, we who are interested in overseas trade need to know, not only for ourselves but for our working people, what we shall have to pay with our sterling currency for the raw material which we buy abroad in foreign currencies and what we can expect in payment in sterling for the finished goods when we have sent them abroad to the export markets. It is for that reason that I would ask your Lordships to give me 861 a little patience, because I would like to search through the clauses of the Bill and explain what, in my opinion, are their implications.
The roots of this Bill were planted in the metaphysical area of relativity by Newton in 1717. There is no doubt about that, and their meaning is just as difficult to understand as Einstein's theory. Newton's principles developed without much alteration right up to Peel's time, when he propounded his famous question: "What is a pound?" Very little alteration of the 1844 Peel Act took place until we passed the Currency Act of 1928, and it is upon that Act of 1928 that this Bill is based. Having been pushed off gold, we are now on a managed currency and on a managed currency which is not anchored to anything. I do not like a managed currency which is anchored to nothing, but it cannot be helped so long as we live in a Bedlam of international politics and international trade, if it be true trade at all. I am compelled to support this Bill without reservation, and I will try to show, if your Lordships will give me your patience, why I think the Bill should be supported even though it extends the principle of a managed currency anchored to nothing. I will, also, if the noble Lord will allow me, put a few questions to him, not because I find fault or wish to criticise, but because I would like to know how the processes which are built up in this Bill will work.
Meanwhile, I ask myself this: What will happen, and I pray it may not happen, if, having a managed currency not anchored to anything, a future Government is tempted, when short of revenue and wishing to buy votes, and uses the managed currency for those purposes? It is a very perilous position. It cannot be helped. This Bill, as my noble friend has said, does not alter the operation of the managed currency, or prevent its being anchored to something, at some ratio, later on. I cannot insist too strongly that a nation whose existence rests on international trade must anchor its currency to something. The colloquial word is stabilisation. Stabilise on what, and at what? We cannot stabilise now, or until those who control the dollar and franc agree upon what they can do, or what they will be compelled to do, apart from what they may wish to do in friendship to us, or may be able to do in relation to sterling. This Bill proceeds from 862 a managed currency in general to a managed account in particular. It legalises the management of accounts. To parody Kaspar about Blenheim "But things like this you know must be with every managed currency." The further step in a managed currency: you manage or cook the account.
Clause 2 provides for the marriage of the Issue Department of the Bank of England, referred to as "the Department," and the Exchange Equalisation Account called "the Fund." It provides that gold or cash or paper can be moved backwards and forwards between the Issue Department and the Fund, for whatever reason, so that the appearance of the Fund may be acceptable to the eyes of foreigners. We do not need that there should be any such appearance in this country. We are quite content and quite happy here with the strength of our own currency. But this management must be done in order to reassure the foreigner. The result of this moving backwards and forwards under Clause 2 is that the amount of note issue henceforth governs the gold in the account instead of, as hitherto, the gold governing the note issue. There is a simple analogy for that. If your room is too cold and you have a fire in it, you put the thermometer near the fire, cook the bulb and increase the record of the temperature. If your room is too hot, you take the thermometer and thrust it out of the window; there it freezes, and you reduce the record of the temperature as shown by the thermometer. Quite simple! You manage the record. That is what this Clause 2 does.
I support the Bill because I have seen what the management of currency has been. I support it so long as the management is still in the same hands and if it is not used or misused by the Government for purchasing votes or making up revenue when we find ourselves short in time of trouble. I would like to pass aside for a moment and to say this. Having taken a part in the Bill and Act of 1928, I have watched the management policy since we were thrust off gold in the latter part of 1931. It is difficult for the public to realise how successfully the currency, not anchored to gold, has been managed by those who have been responsible for its management. Never was the apophthegm more applicable: that a precaution is never more efficacious than 863 when the need for it is scarcely seen. The currency has been so successfully managed that the public do not realise what has been done.
I do not say who has done it. It is not proper to mention names. But I suppose the management of the currency has been in the hands of the Governor and his colleagues of the Board of the Bank of England who have worked with our own expert men at the Treasury. Well, the Directors of the Bank of England are sometimes sneered at by the Party opposite; but they are entitled to much credit and gratitude. They, being in touch with the realities of trade, have worked with and advised the Treasury how to handle the managed currency. The result has been so successful that the public has never realised how successfully we have escaped the dangers of a managed currency by the careful handling by the authorities responsible.
And of how successful it has been I would like to give your Lordships a proof. Out of every ten mouthfuls of food we eat eight of them are imported, and therefore the exchange value of sterling is of great importance. A housewife can with 100 pennies put as much food upon her dinner table as she could with the same sum in December, 1930, before we went off the gold standard. There has practically been no extra cost of imported food from the housewife's point of view from when we were on gold in December, 1930, till January 1 this year. Painting the thing with a broad brush, the difference has only been one penny in a hundred pennies. Think, on the contrary, of the position of the French housewife. For everything she had to buy last week which was imported she had to pay seven francs where she paid in 1913 one franc. Comparing the position of the British housewife now with the golden age before the War, she pays no more than 5s. 6d. for what she paid 5s. in 1913—a very nearly negligible difference—and that has been amply compensated by the increase of wages.
Your Lordships see therefore that those who sneer at the currency and credit management by the Bank of England and the Treasury are not justified. The Socialist Party seem to have an inexplicable desire to destroy the Bank of England as an independent central bank. Even over 864 this Bill they seem to have chuckled and rubbed their hands with glee at the thought that this new Bill will do something to alter the relationship between the Issue Department and the Treasury. Not so. Under the Act of 1928 all the profits of the Issue Department went to the Treasury. To-day all the profits of the Issue Department still will, by this Bill, go to the State, through the Exchange Fund, when the Exchange Fund is wound up. And I think that the Socialists' demand for the politicalisation of the Bank of England should wait a bit until they have read, later on, the biography of Dr. Schacht and have seen what the results have been of a Socialist or National Socialist Government making a tool of the central bank of a great nation. They will then probably have some other views about the benefits or dangers of politicalising a central bank.
Then some of those who are opposed to us in politics say that this Bill cuts the last link with gold. The answer is quite plain, if they understood the Bill—that gold always comes into the present management policy, if purchased or sold, and until it is dealt with later on by the Exchange Account, which belongs to the Government. One distinguished leader of the intelligentsia portion of the Labour Party described the Bill, in an urbane and delicate term, as a Bill for Debunking Gold. Those who say that do not understand the working of the sterling exchange. The dollar is on gold. You can take what gold you like to the United States and they will give you 35 dollars for an ounce of it. The Exchange Fund was created to keep sterling steady with the dollar or vice versa—to iron out the undulations. Our currency exchange is therefore related to the dollar based on gold. So far from being cut adrift from gold, or so far from this Bill, which deals with the Equalisation Fund, debunking gold, as it is called, why gold is a link, and is now made a stronger link, between our sterling and the exchanges of the world.
Again I ask this: If gold has been dethroned, why was it necessary for our central bank, when requiring to earmark something in South Africa during the crisis, to earmark, not mealies, or diamonds, or citrus fruit, but gold? Is this evidence of the dethroning of gold in relation to our exchange? And the Dutch, who recently sent gold for refuge both 865 here and to America, have used gold to protect their wealth. And the object of this Bill is to show the foreigners that our paper notes are protected with gold. Thus when people talk about the debunking of gold, or about gold being cut adrift as a link in our currency system, it shows that they have not grasped the meaning or working of the currency and credit system which we are debating. Again, during the anxieties of last autumn the one vehicle which everyone all over the world turned to for transferring wealth from one country to another was gold. And, to sum up, until I see various countries in future times using as a vehicle or symbol of wealth cowrie shells, or horse shoes or golf balls, or empty champagne bottles, or motor tyres for transferring wealth, I shall not believe that gold, as one of the favourite vehicles for the transfer of wealth, has been dethroned.
My noble friend made one reference to an aspect of this Bill to which I respond. He said that I must be pleased that no section in the Act of 1928 had been altered. I am. In particular there is one section which people have asked about which I am glad to hear has not been altered. There is a section—I think it is Section 11 of the 1928 Act. I remember its being debated in another place. I remember the answer we gave. I think Sir Laming Worthington-Evans then gave the answer in detail—that we would maintain the right of the Bank of England, through that Act, to requisition gold over an amount, I think, of £10,000 if in the hands of a British resident in the United Kingdom. It was specially stated that that clause was not meant to act as a clog upon the legitimate buying and selling of gold as a metal, or to prevent foreigners from sending gold here and remaining the owners of it. I am glad that section is kept in. I think it is a wrong thing that a British subject should be allowed in time of panic to start hoarding gold and throwing doubt upon the validity of the British paper pound. I am glad the old Section of 1928 has not been taken out. It has never been used, but if any British subject here in time of trouble or panic should wish to hoard gold and not to take Bank of England notes he should be made to smart for so doing.
I am glad that Clause 4 contains the cancellation of Section 4 of the Bank Charter Act, 1844. Subsection (2) says: 866Section four of the Bank Charter Act, 1844 (which requires the Department to issue notes in return for gold), shall cease to have effect.I am glad that clause has been put into this Bill. I tried to induce members of the Government in another place when I was speaking on March 11, 1932, on the Financial Emergency Bill to cancel that section of the 1844 Act. That section in the old Act of 1844 means this. Under that Act persons who were frightened about the value of gold could compel the Bank of England to give notes in exchange for their gold, whether it wanted to or not. There is still a danger of our being compelled to issue notes against unwanted gold. This new subsection to which I have referred removes that danger.
May I explain what that danger is? No one can forecast the picture in the future kaleidoscope of international affairs. When we debated the Bill of 1928 I do not believe many members in the House of Commons or people in the country had heard—certainly I had never heard—of the Austrian Credit Anstalt. I did not imagine that the collapse of that bank would soon throw the whole of the currencies of the civilised world into confusion. It was quite unforeseen. I will explain what I think may happen, what the dangers still are, unless this section of the Bank Act of 1844 is cancelled as it is going to be cancelled by the Bill. Something equally unforeseen may occur. We might be swamped by a flood of unwanted gold coming here as a result of a new circumstance arising in future, as in 1931. There has been an unexpected increase in the production of raw gold. There may be further advances in scientific knowledge allowing gold to be extracted to a greater degree from low grade ore. We may one day find that Russia is producing in Siberia additional volumes of gold. The world is producing to-day £300,000,000 sterling of gold per annum. That is three times as much as it was producing in value before the War broke out. The United States holds £3,000,000,000 sterling of gold. In the next ten years we shall produce another £3,000,000,000 sterling. Is the United States going to take that gold?
Will she continue indefinitely to give us goods and services, food, grains and securities bearing interest for a metal which she cannot eat or use and does not 867 want to put into her currency system because of the fear of creating inflation and therefore has stored away in one of her interior States? Is she going to continue to buy that volume of gold in the next ten years, and if she does take it will she continue to give 35 dollars an ounce for it? She may give much less. She may require for every dollar twice as many grains of gold as she is now receiving. In that case the value of gold will go down. She might even refuse to buy gold at all. Who will buy the gold if the United States refuses to take it? It might be forced on us by people who have gold, whether from the mines or banks or private hoards, and pushed into the Bank of England and Bank of England bank notes taken out at a price which in the circumstances we do not wish to give. As no other buyer would exist except the United States, we might find ourselves landed with a commodity of little or no value. Therefore I am glad that subsection (2) of Clause 4 has been put into this present Bill to give power to the Bank of England to refuse to buy gold if it so desires.
We do not know how the volatile monetary policy of the United States may change. Her silver policy has turned out to be a failure. She went into a silver policy because she was forced by voting power. She put up the price of silver, wrecked the Chinese currency; now she has found out her mistake and may alter her silver policy suddenly. She may decide to refuse to buy gold, any day. We may be faced with that overnight. That is one of the reasons—what America will do about her gold price and policy—why we cannot stabilise exchange, much as we wish to anchor the exchange value of our own currency to something. Therefore I must be content to vote for this Bill because I see no hope yet of any stabilisation. We do not know what the policy of America will be. There is no doubt about the friendliness of America towards us, and there is no doubt about the friendliness of France, but the whole thing is in such a state of flux that no one can form a sterling exchange policy until matters are on a firmer basis.
I wish to put some questions to my noble friend. Why should the fiduciary issue be fixed at £300,000,000? I know it may be increased or decreased under 868 the Treasury Minute of 1928. But when it was my duty as Financial Secretary to the Treasury to introduce the 1928 Bill and explain it to the House of Commons, I felt it incumbent on me to explain with great minuteness that the fiduciary issue was put at £260,000,000. For some weeks before the debate we had made calculations and found that the amount we could put it at, to be accurate, would be £258,690,000. We had calculated so closely that we attached importance to a limit of £10,000. In my speech I explained we had put it at £260,000,000, and excused myself by saying we thought it just as well to round off with an even figure. I do not know why we have got £300,000,000. I know that £400,000,000, reduced by £100,000,000 by the present proceeding, would leave £300,000,000; but why not £310,000,000, £290,000,000. £280,000,000, or £330,000,000? There is plenty of slack rope possible under the 1928 Minute, to alter the fiduciary issue up or down. Why do the Government hit upon £300,000,000? Does it mean that any sum would do under managed currency?
There is another question I wish to ask. I grasp the point of the transfer of £95,000,000 less £9,000,000 to the Exchange Equalisation Fund. Does it mean there is a loss of £9,000,000 on securities taken up by the Issue Department? Am I to suspect that the Issue Department took up some loans for the Government that the public would not take and now finds that the loans are worth less than the price at which they were issued, and has to arrange for this £9,000,000 to be deducted from the £95,000,000? A further question I wish to ask is in regard to the mechanical or accounting method by which the ragged odd £5,000,000 of notes in reserve is to be reduced in the Issue Department and the Banking Department. How will the notes or securities in either or both of these Departments be adjusted?
Then there is another point to which I wish to direct your Lordships' attention. When we were fighting to save the gold standard in the summer of 1931 we had to borrow £130,000,000—£80,000,000 and £50,000,000—some of it in New York and some in Paris. I may have forgotten what happened about this £130,000,000 in 1931. I cannot charge my memory about how that transaction was adjusted 869 after we went off the gold standard, but I think someone said somewhere that the loss, if any, would be kept in abeyance until the winding up of the Exchange Fund. If this £130,000,000 has not been dealt with, is it still to be dealt with when the Exchange Fund is wound up under the Act of 1932? I should like my noble friend to tell me if anything has been done or is going to be done, and, if so, what, about this £130,000,000 transaction. I do not expect he can answer now. We shall have another stage of the Bill, and I will be content if he will be so kind as to give his answer when it is convenient to himself.
Then there is a final question I would like to ask. We had a friendly passage of arms, I think in 1937, about the Public Accounts Committee receiving a report on the Exchange Fund. I do not know if my noble friend will remember that I then ventured to express the opinion that I did not think the report either to the Public Accounts Committee or to the public would be of much service. What service can that report be now when this Bill is passed? How can it record the operations of the Exchange Fund for ironing out exchange, its real function? Look at the accounting position we had at the time of the 1937 debate. You now put £95,000,000, less £9,000,000, into the fund. Every two or three weeks or less you now will alter the contents of the Exchange Fund and Issue Department by moving paper or gold or cash like a shuttle between the two. Then in future you will record in the accounts of the Fund the profit or loss on the fiduciary issue.
Again, the Government may have to take up part of an issue of a Government Loan because the public does not take it. Later the Government peddles out the stock when Departments need money, and the profits, if any, of these Stock Exchange jobbing transactions go either into the Issue Department or into the Exchange Fund, which are now merged and have a common purse. Or the losses, if the markets fall. Those transactions of a various nature will appear in the Exchange Fund accounts, and if the arrangement still subsists they will be given to the Public Accounts Committee, many months after the transactions have taken place. I maintain that if this Exchange Fund Report is to go to the 870 Public Accounts Committee containing all these transactions, then it is quite useless for the purpose intended. Not only does it throw dust in the eyes of the public, but with its altered factors is misleading. I submit, therefore, that the form of the report to the Public Accounts Committee should be reconsidered.
I apologise for speaking at such length, but, to sum up, I justify myself in supporting this Bill because I assume that the stabilisation of sterling by anchoring it to something is our ultimate aim. I know that stabilisation is not possible at present, and I must be content to tolerate a policy of managed currency and managed balance sheets, trusting that no Government will be tempted to use the managed currency for purposes which will wreck the exchange value of our currency or ruin our savings. Therefore I am compelled, until we get stabilisation, to accept the further management as provided for in this Bill and beg leave to give my support to it.
§ LORD ARNOLD
My Lords, before I come to consider the provisions of this Bill, I would like to say a word about the question which the noble Lord, Lord Mancroft, raised regarding the £80,000,000 and £50,000,000 which we borrowed in 1931. I take it that what he has in mind there is, what was done in regard to the losses when that money was repaid? I believe I am correct in saying that the loss turned out to be much less than was expected, and many people, I think, put it at about £8,000,000. Speaking from memory, my own impression is that there is a clause in the Finance Act of 1932—I think it is Clause 25 or Clause 26—which dealt with this up to a point. I am glad the noble Lord has raised the matter so that we may know exactly what occurred to the loss, and what was the complete implication of the clause which was certainly in the Finance Act of 1932.
This Bill obviously carries further the system of a managed currency. In fact it is not going too far to say that a managed currency has come in Great Britain and that it has come to stay. It is to me scarcely credible that the country will ever go back to the gold standard of former years. The noble Lord, Lord Mancroft, is not pleased about that; he is not pleased at any rate with a managed 871 currency. He has done his best, I think, to make your Lordships' flesh creep, but I do not think he was very successful. He cast longing eyes back to some kind of anchored currency, but I would remind him that in times of crisis an anchored currency is not necessarily something which will be maintained. The anchor may, so to speak, be dragged, or it may even be hauled up. Therefore, even if we get back to an anchored currency, you have not that degree of permanence which the noble Lord seemed to suggest.
The noble Lord, Lord Mancroft, referred to the whole matter as being almost completely incomprehensible. He even tried to confuse your Lordships' minds by a reference to the extraordinarily difficult subject of relativity. I agree that this is a complicated Bill, but the noble Lord, Lord Templemore, if he will allow me to say so, introduced it very lucidly, and I do not think the position is quite so complex as the noble Lord, Lord Mancroft, suggested. At any rate I will try to make a few observations, which, as I see the matter, explain what has happened, and which, I think, show that on the whole this Exchange Equalisation Account has done its work well, although, as I will explain, its functions have been extended beyond what was originally intended. This particular Bill is largely occasioned, as the noble Lord, Lord Templemore, made clear, by the withdrawal of foreign balances from London, with a consequent drain of gold. In pre-War days—and I would commend this to Lord Mancroft very earnestly—that gold would all have come from the Bank of England, and that would have meant that the bank rate would have been raised probably more than once. We might, indeed, have had to have a high bank rate to deal with the situation. That would have happened, as in the last six or nine months of last year, at a time of trade recession, and it would have been definitely injurious, because at a time of trade recession it is obviously harmful to have the bank rate changing upwards until perhaps we have got a very high bank rate.
The noble Lord, Lord Mancroft, referred to the crisis of 1931, and to the great withdrawals of gold which took place at that time; but actually the total amount of gold withdrawn from this country between March and December of 872 last year was in excess—I think considerably in excess—of the gold which was withdrawn in 1931. The period may have been different but the amount was certainly in excess. This is the point I want to emphasize—the noble Lord, Lord Mancroft, admitted it. Very few people knew what was happening or what was going on, but they would have known under the old system owing to the bank rate being put up. The fact is that this Exchange Equalisation Account is now performing two functions. It is not only being used as was originally intended under the Act of 1932 for ironing out undue fluctuations in the exchange value of sterling, but it is being used for the purpose of helping to keep steady interest rates in this country, and of avoiding as far as possible changes in the bank rate due to external factors. That is a beneficial process because, as I have indicated and as your Lordships know well, these changes in the bank rate were always a disturbing factor to trade and industry. As it is, there has been in this country for a long time a bank rate of 2 per cent., and it is largely to the Exchange Equalisation Account that we have been able to maintain this low bank rate—that is to say, a bank rate which it has not been necessary to change owing to external factors. Therefore I would submit that the double function which the Exchange Equalisation Account is now serving very fully justifies its existence and quite outweighs the objections—and there are objections—which may be urged against the Account.
Now, as the noble Lord, Lord Templemore, has explained, this Bill is largely one of machinery, and your Lordships will not be disposed to look at it with critical eyes. It passed through another place really without opposition. As the noble Lord explained, under Clause 2 of the Bill the gold in the Issue Department of the Bank of England is in the future to be valued at the current market price—148s. per ounce at present—and not at its antiquated price of 85s. In consequence of that, the gold in the Bank of England, which has been valued at £126,000,000, will be raised to £220,000,000. I should like to raise one or two points with regard to this £220,000,000 worth of gold in the Bank of England. That gold is, in effect, immobilised. That gold is not really necessary for the purposes of internal currency, 873 but gold in the Bank of England is a factor in giving confidence, especially to foreign financiers. But if it is designed to increase the note issue for internal purposes, then it is best to accustom the public—I repeat, to accustom the public—and the world to this being done by an increase of the fiduciary note issue. That at any rate is one thing which is being done by this Bill.
As a result of this Bill the fiduciary note issue is fixed at £300,000,000. I was interested in the question which the noble Lord, Lord Mancroft, asked about that—which, if I may say so, was a very proper question. I should be glad to know exactly what the Government have to say about that, and why it is fixed at £300,000,000 against the £260,000,000 which was the original figure. In a sense there will be against that fiduciary note issue of £300,000,000—it is not a backing for it—gold at the Bank of England of the value of £220,000,000, valuing it at the current market price instead of £126,000,000 at the old price of 85s. per ounce. The position will be that there will be a fiduciary note issue of £300,000,000 and though it is not security against that there will be in the Bank of England gold worth £220,000,000. That being the case, the Bill establishes a definitely more satisfactory state of things from the point of view of the public and of the foreigners who have balances in London.
If the Bill were not passed and if the position remained as it was at the end of last year, there would have been a fiduciary note issue of no less than £400,000,000—that is what it had been raised to—and gold in the Bank of England valued at only £126,000,000. I say again that one of the chief objects of keeping gold in the Bank of England is to give confidence to foreigners. If the Exchange Equalisation Account withdrew gold from the Bank of England that would probably be done at a time when the Exchange Equalisation Account was itself losing gold on account of the withdrawal of foreign balances. The fact that the Bank of England was losing gold at such a time might well cause a certain lack of confidence among foreigners with consequent adverse effects upon sterling. That would be all the more likely to happen because the Bank of England publishes the amount of its gold holding weekly and therefore its losses can be seen 874 weekly, whereas the Exchange Equalisation Account only publishes figures which are several months old.
I would like to ask the noble Lord, Lord Templemore, a question about these foreign and Dominion balances which are known as "hot money." Personally I strongly object to the term, which I do not think is very expressive, but there it is. What is the estimated amount of these balances? I ask that because I think we should know what is the excess of our total holding of gold over the claims which may be made on sterling in respect of foreign and Dominion balances. If the noble Lord cannot give that figure to date, could he say what it was last September, or could he give an approximate figure? I think we are entitled to know. I am aware that the Government can always assume complete ignorance when it suits them, but I also know that they can probably get an answer which at any rate is correct within about one per cent., and I should be quite content with that. I think we are entitled to know.
This was a matter of very great importance and of very great discussion at the time of the 1931 crisis. It is not known outside official circles what is the precise total of our gold holdings at this date, but we know that on September 30 last it was £689,000,000. We do know that. We know that there is £220,000,000 in the Bank of England and we know that £350,000,000 has been handed over to the Exchange Equalisation Fund, so that we must have a total of at least £570,000,000. Probably the actual figure is in excess of that. I would suggest that it is considerably in excess of £600,000,000. The point about which I want information is how much that figure of £600,000,000—or of only £570,000,000 if you like—is in excess of claims which might be made on sterling by foreigners and the Dominions in respect of "hot money."
When this Exchange Equalisation Account was being discussed in your Lordships' House in 1937, on the Bill of that year, I pointed out that the capacity to buy gold was really much greater than the £550,000,000 which Parliament was then authorising for the use of the Exchange Equalisation Account. The reason for that was that when the Exchange Equalisation Account bought gold for the Bank of England it was 875 passed to the Issue Department at 85s. an ounce, and the Account received from the Bank of England in securities or some other form the difference between 85s. and the then price of £7 an ounce. With these securities the Exchange Equalisation Account could buy further gold at its then price of £7 an ounce. That meant that whereas at that time Parliament was authorising the Exchange Equalisation Account to increase the Account by £200,000,000, in fact there could be bought—I do not say would be—with that £200,000,000 as much as £330,000,000 of gold at the then price.
Quite obviously this Bill carries this possibility a great deal further. As the gold in the Bank of England is to be valued at the current market rate, which is at this moment about 148s. or £7 8s., then in future if the Exchange Equalisation Account buys gold for the bank it will be reimbursed, not as before at 85s. an ounce, but the Exchange Equalisation Account will be reimbursed in some form for the full cost at the present price—say, 148s. per ounce. With this reimbursement the Exchange Equalisation Account will be free to buy further gold, and therefore its potential capacity to buy further gold is by the Bill greatly increased.
I have said that the present total of the gold holding in this country is in excess of £600,000,000. At any rate in theory, there appears to be nothing either in this Bill or in any other, so far as I know, to stop the gold holding being raised very much above the present figure. In fact, I estimate that the total gold holdings of the country could be brought up as high as £1,156,000,000. I see the noble Lord, Lord Templemore, looks a little startled at that, but I will explain to him how I arrive at that figure. There is £220,000,000 of gold in the Bank of England to begin with, and the total amount of the Exchange Equalisation Account—which might be all used for the purchase of gold—is £550,000,000. Those two sums together come to £770,000,000. To that I add £86,000,000, which is the item of profit which under this Bill is being transferred from the Bank of England to the Exchange Equalisation Account. That might all be used for the purchase of gold; there is nothing to stop it, as far as I know, but if I am wrong the noble Lord 876 will correct me. If that were all used for the purchase of gold, the £770,000,000 would be brought up to £856,000,000.
I am now coming to the last figure to be considered, and that is the figure of the fiduciary note issue, which is being fixed by this Bill at £300,000,000. The backing for this £300,000,000 in the Bank of England at the present time is in the form of securities, but gold might be substituted for those securities through the intervention of the Exchange Equalisation Account. That is the point I want to put to the noble Lord. If that were done, the fiduciary note issue, as such, would be replaced by a note issue backed by gold. Everything that I have been speaking of might be effected without any real change in the internal currency of the country. My total is arrived at by adding together £220,000,000 in the Bank of England, £550,000,000 in the Exchange Equalisation Account—which might all be used for the purchase of gold—£86,000,000 of profit, and this £300,000,000 in the fiduciary note issue. Those are the possibilities. There appears to be no legal power to stop that being done. I say "legal power"; if there is, I hope the noble Lord will tell us what it is. Of course I know it may be argued that there is no very great objection to this, and that in certain circumstances it might be a good thing to have as much as £1,156,000,000 of gold.
The noble Lord, Lord Mancroft, strayed into the area of foreign policy. It is very difficult to avoid it in these days. I am not really going to do that, but the consideration of one or two aspects of foreign policy is not really out of order to-day. It is relevant to call attention to what might be the effect on some foreign countries of the acquisition by Great Britain of such a gigantic gold holding as £1,156,000,000. Already about four-fifths of the gold holdings of the world are held by three countries only: the United States, Britain and France. On the other hand, there are great countries where there is very little gold, where there is great gold hunger. It is not very difficult to imagine—there is nothing fantastic about this at all—circumstances in which this "maldistribution" of gold holding might lead to international friction. It might very much come into the argument, of which we hear a great deal from time to time, about the "haves" and the "have- 877 nots." At all events it is right to point out these possibilities and to emphasize that Parliament in this Bill, as in the previous Bill of 1937, is making possible the acquisition of a much larger gold holding by the Exchange Equalisation Account than the amount of that account would itself seem to authorise.
Finally I want to make it clear that the possibility of de acquisition by Great Britain of a total gold holding of £1,156,000,000 is due to the fact that there is nothing in law to prevent the Bank of England and the Treasury reducing the fiduciary note issue of £300,000,000 to nothing and substituting a note issue backed by gold. Under Section 2 (2) of the Currency and Bank Notes Act, 1928, the Treasury, on the representation of the Bank of England, has power to reduce even to nothing the amount of the fiduciary note issue, which is now fixed by this Bill at £300,000,000. On the other hand, in that same Act, of which the noble Lord, Lord Mancroft, has spoken so much, under Section 8 (1) the Bank of England and the Treasury between them may increase the amount of the fiduciary note issue for a total period as long as two years, after which Parliamentary sanction is required. The Chancellor of the Exchequer is now coming to Parliament under this Bill to fix the fiduciary note issue at £300,000,000, but there is nothing in the Act to compel him to come down actually until a total of two years has elapsed.
That is the increase. For the reduction of the fiduciary note issue there is no need to come to Parliament at any time, as I see it, and I should like to commend that point to the noble Lord, Lord Templemore. Unless I heard him wrongly—and I do not think I did, for he is a very clear speaker—he said that the Treasury could either increase or reduce the issue temporarily. If he will look at Section 2 (2) of the Currency and Bank Notes Act, 1928, I think he will agree with me that there is nothing in it about the increase or reduction being temporary. As I read it, there is nothing in it to prevent the Treasury and the Bank of England between them wiping out the whole fiduciary note issue without recourse to Parliament. Indeed, I remember that in 1937 a question was asked in another place pointing to this possibility, and the reply of the Chancellor of the Exchequer was by no means conclusive on the point. 878 It seems to me to leave the way open to exactly what I am now indicating.
I think this is a point we ought to consider when this Bill is before your Lordships' House. We do not often have the opportunity of debating a Currency Bill, and I have called attention to these points to show that Parliament now, as the law stands, has not full control over these matters. The time might come when it might be thought advisable to amend the Currency and Bank Notes Act, 1928, so as to make certain that no great change in the fiduciary note issue, either up or down, could be made without the ultimate sanction of Parliament. I say the ultimate sanction of Parliament. I am not suggesting it is a thing which has got to be done speedily. At any rate I submit it is plain that there may be bigger issues involved in these various problems than were realised when the Bill of 1928 was piloted through another place by the noble Lord, Lord Mancroft—both in that Bill and in the 1932 Bill—and the time may come when it may be thought well to make some change in the law. At any rate I think that this Bill is an appropriate occasion for raising these questions.
§ LORD TEMPLEMORE
My Lords, I think we must all agree that the Second Reading of this Bill has given rise to an extraordinarily interesting debate. I only wish that your Lordships' House had been a little fuller to hear the two excellent speeches, if I may say so, that we have listened to from Lord Mancroft and Lord Arnold. They dealt with this question in the fullest way and their speeches were, I am sure, full of instruction and interest.
I will take the speech of Lord Mancroft first. He asked me a few questions to which I think I can give him the answers. He asked me first of all why the fiduciary issue was to be fixed at £300,000,000. The reason for that is that in the light of the recent transfer of gold to the Exchange Equalisation Account and of the decision to revalue the gold still remaining in the Issue Department, Clause 1 of the present Bill fixes the amount of the fiduciary note issue at £300,000,000, subject to the existing powers of the Treasury temporarily to reduce or increase that figure. The total note issue is £526,000,000, of which £126,000,000 is covered by gold (valued at the old mint price of 85s. per fine 879 ounce) and the remaining £400,000,000 by securities. When revalued at the current price the gold will be worth about £221,000,000, and the value of the notes which will be uncovered by gold will be, in round figures, £300,000,000. Your Lordships will realise that the result of the first revaluation of the gold in the Issue Department of the Bank of England will be to show an increase of £95,000,000 approximately in the value of that gold. On the other hand, as a result of a period of falling security prices, the securities in the Issue Department are expected to show a depreciation of about £9,000,000 below their present book value of £400,000,000. In the result therefore the net initial transfer from the Issue Department to the Exchange Equalisation Account will be about £86,000,000.
The noble Lord also asked me the reason for the loss of the £9,000,000 on the securities. My answer to that is that any holding of Government securities must, like any other security, reflect the falls in such securities which have taken place during the last year or eighteen months. The third question of the noble Lord is about the £5,000,000 remaining over after the first valuation. This can be answered as follows. On the first revaluation it is expected that the assets of the Issue Department will be valued approximately at £221,000,000 of gold and £391,000,000 of securities. That is a total of £612,000,000. The note issue (assuming that there is by then no change from the present level) will be £526,000,000. The surplus to be surrendered to the Exchange Equalisation Account will therefore be £86,000,000. It is not intended to disturb the existing quantity of gold in the Issue Department, so that the Department would transfer the whole of the £86,000,000 in securities. That transfer will leave the securities at £305,000,000 or £5,000,000 in excess of the fiduciary issue. In the absence of some adjustment the total note issue would therefore have to be reduced by £5,000,000. I would like to inform the House that the gold holding of the Issue Department will be so adjusted that the total note issue immediately after the first valuation will stand at approximately the same figure as it does to-day.
Then the noble Lord also raised a question about the loss on the credits raised 880 by the Treasury in 1931 to defend the pound. I would like to say that the loss involved in repaying these credits after we went off the gold standard was met by the Exchequer out of borrowed money. The loss on the credits raised by the Bank of England was met out of the Exchequer Equalisation Account.
§ LORD MANCROFT
Do I understand that whatever has been lost in respect of the £130,000,000 fighting fund has entirely been liquidated, dealt with and finished with?
§ LORD TEMPLEMORE
I am not quite clear, but I understand that that is so. If he will allow me to make inquiries I will let him know privately. I now turn to the speech of the noble Lord, Lord Arnold. He really only asked me one main question—namely, as to the figures of foreign borrowings held in this country—in other words "hot money." I rather agree with the noble Lord, in that I do not understand that expression, and I prefer to speak about foreign borrowings. I am not really affecting ignorance on this matter, but I have made inquiries and I am told that, while there are no official estimates available, a close watch is always kept on the situation. At the same time I regret that it is impossible to give statistics in this matter, for this reason: Foreign money in this country is invested or held in so many different forms that statistical checks are very nearly useless. As, however, I have already indicated, that does not mean that the authorities do not systematically study the matter and obtain all the information available.
I am very sorry not to be able to answer the noble Lord, who is always so courteous in these matters, but I am really unable to do so. The noble Lord is perfectly right in saying that the £86,000,000 which is to be transferred to the Exchange Equalisation Account will increase the resources of the Account and could be used for buying gold. He is also right in saying that legally and in theory the fiduciary note issue could be reduced to zero by the substitution of gold for securities. But this last possibility I would like to point out is not a new one. It could have arisen under the Act of 1928 and the present Bill makes no difference in that respect. I have done my best and I think I have answered the questions which were asked me. As I 881 have said, we have had a very interesting debate, as we always do have on these subjects in your Lordships' House. I trust the House is now ready to come to a decision to give the Bill a Second Reading.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.