HL Deb 30 November 1950 vol 169 cc658-72

4.17 p.m.

Order of the Day for the Second Reading read.

LORD PAKENHAM

My Lords, I rise to move the Second Reading of the European Payments Union (Financial Provisions) Bill. I am aware that the House has important Business to follow, and your Lordships will therefore not wish me to detain you for any great length of time. But this is a very intricate matter and if it is to be discussed at all in a manner worthy of your Lordships' House I am afraid that I must go into it in a little detail, and try to elucidate its principles in a way that will be intelligible to all, whether they have made a special study of this matter or not. The European Payments Union is an organ of the O.E.E.C, established for settling payments between member countries arising out of their transactions with one another. One of the aims of O.E.E.C, which was set out in its Convention, was that the member countries should co-operate to develop the maximum possible inter-change of goods and services—an aim which surely all of us will support.

As the House is well aware, trade within Europe, and between Europe and the sterling area since the war, has hitherto been almost entirely in bilateral channels, due mainly to the fact that there were only bilateral Payments Agreements. Early this year, however, O.E.E.C. decided upon a multilateral Payments Union, and agreed that as soon as a satisfactory Union was established the percentage of trade liberalised should be increased; that is to say that the percentage of trade free from quantitative restrictions should be increased from 50 to 60 per cent. The agreement for the establishment of a European Payments Union on the basis of these principles was signed in Paris in September, and although it was to come into force only after ratification by all the signatories, it was agreed to apply it on a provisional basis, to operate it in practice, from the beginning of July. I would mention that so far only the Swiss have deposited instruments of ratification, but our country will do so after the passing of this Bill. The present Bill gives the statutory authority for the provisions required to carry out the Agreement by specifying the accounts which are to be used for the various types of transaction.

Before I come to the main features of the Union, which I will take fairly rapidly, I think the House will wish me to say a few words about multilateralism and bilateralism. May I give hypothetical examples (they can also be practical, as I think will be obvious to your Lordships) to illustrate the difference in the operation of these two systems? Under the bilateral system a noble Lord—shall we say the noble Lord, Lord Rennell?—can buy from me only to the extent that I am ready to buy from him. Supposing, for example, he is ready to buy from me the Labour Party pamphlet, Labour and the New Society, but suppose I am not ready to buy from him the Conservative pamphlet (because I know it so well already), This is the Road. Under bilateralism we are at a deadlock, and no trade takes place. If, however, we introduce the multilateral system and bring in, shall we say, the noble Viscount, Lord Samuel (who is unfortunately not with us today), we may find that the noble Viscount, Lord Samuel—who I know is never too old to learn—has been ready to buy the Conservative pamphlet in question, so that Lord Rennell possesses that amount of credit with him. We are assuming, of course, that all the documents concerned are of equal monetary value, whatever their other values may or may not be. Under multilaterism then, Lord Rennell will be able to use his credit with Lord Samuel to buy my document. He therefore buys mine, Lord Samuel buys his, and I am able to use my credit with Lord Samuel to buy Lord Samuel's document—which is called, I believe, No Easy Way. That is multilateralism working perfectly. Trade is maximised, everybody sells his product, and all finish "all square"—and very much enlightened in the bargain.

But, of course, there is a risk in multilateralism. It is possible, for example, that I may not want to use my credit with the noble Viscount, Lord Samuel, to buy the Liberal Party document. Looking at another quarter of the House, I may wish to buy a religious pamphlet published by the most reverend Primate the Archbishop of York—his fine speech of yesterday, for example. In that case Lord Samuel's reserves would be weakened and, assuming that the most reverend Primate is not ready to indoctrinate himself with any more Liberalism, Lord Samuel's reserves would be weakened; and if the process continued, in the extreme case they would disappear. In short, in certain circumstances which are similar to those which have prevailed in some countries since the war, multilateralism may well jeopardise the reserves of individual countries, although ideally it is the one method to maximise total trade and increase the wealth of the world.

The provisions of the Agreement afford a restoration of multilateralism in European trade. I ought to make it plain, because some noble Lords may not be aware of this fact, that in talking of Europe in this context I include not only trade in Europe but trade between Europe and the rest of the sterling area. I now take the scheme itself. The features of the scheme may be considered broadly under three heads. First, there are the essential features of the payments scheme; secondly, the particular or incidental features of the payments scheme; and thirdly, the provisions for liberalising trade, for removing quantitative restrictions.

The essential features of the payments scheme are extremely complicated and technical. May I interpret them broadly in simple language? First of all, the Agreement provides an arrangement whereby every country settles its individual debts to other countries through a central agency or clearinghouse. That, of course, in itself provides multilateralism. Secondly, there is the manner of payment—again I will not go into details. Under this plan, when a country gets into debt with the Union, that is, collectively with all the other countries constituting the Union, it settles the debt partly in gold and partly in credit. Similarly, when a country finds itself in credit with the Union, it is paid partly in gold and partly in credit. Thirdly, still sticking to the basic principles of the Payments Union, there is the allotment of quotas. The quota of each country is the field within which it settles, partly in gold and partly in credit, and the various quotas are allotted to the various countries on the basis of their 1949 trade, which seems a reasonable arrangement. Some noble Lord may ask: what happens when a country's quota is exhausted? The answer is that then the Union have to consider specially what should be done as and when that arises.

I should like to try one more analogy which seems to me to help to explain what I have just said, though I promise not to detain the House very long over these intricate matters. Some of your Lordships may have stayed at a house party where cards are played, and I ask your Lordships to imagine a house party where nobody is required to settle at the end of a rubber of bridge but where, at the end of a visit, everybody pays his debts or receives payment, not from his various opponents but from the kindly host. That gives the basic idea of the Payments Union. Secondly, let us imagine—which is not always the case in my limited and obsolete experience of house parties—that the house party is intended to last for an indefinite period, and that at the end of every month all the guests are expected to settle their accounts. As they cannot be expected to be paid their winnings entirely in cash, to a considerable extent their accounts are made to run on with the host, whether they win or lose. Imagine, thirdly, that all those concerned are given quotas, but that those who play on the heaviest scale—who like to play bridge for penny points, rather than for 3d. a hundred—are given a larger quota, so that if they lose a few pounds they do not have to settle at once and altogether in cash, and, equally, if they win a few pounds from others they do not have to be paid altogether in cash. I am sure my analogy fits the facts, and I offer it to the House as an intelligible illustration of the arrangements.

I now come to one of the main incidental features of the scheme, that which deals with the existing balances position. The clearing system of the European Payments Union applies to transactions entered into between member countries after July 1, 1950. It does not automatically deal with debts and balances built up previously and which were outstanding at that date. The main problem here was the sterling balances held by other European countries, amounting to some £200,000,000. The balance held by Portugal was £80,000,000; by Italy, £60,000,000; by France, £28,000,000; and by Sweden, £22,000,000. What has been arranged is this: As regards sterling balances when a country is in deficit with the Union, we have given an undertaking that we will allow any sterling held by a member country to be used freely to pay its bill to the Union. And if any noble Lord asks how we are able to do that so confidently, I reply that we are able to do this because E.C.A. gave us a guarantee against any loss of gold on this account. As regards sterling balances where a country is all square or in credit, and where one might feel that their need is not so great, we have been negotiating with the countries concerned for the orderly repayment of some part at least of their balances. Finally, under this head I should mention the countries who owe money to us. We have been negotiating the terms of repayment. The biggest sum here was a Danish debt of £24,500,000, which is to be funded, and there are also smaller sums owing to us from Holland (£8,000,000), Switzerland (£4,750,000) and Norway (£2,750,000).

The third heading of the features of the scheme which I mentioned was the provision for liberalising trade. In the first place, it is laid down that European countries should no longer discriminate in their import policies between other countries who are members of he Union. At the same time the percentage of each country's imports on private account which has to be set free from quantitative restrictions has been raised to 60 per cent., and is to go up still further next February to 75 per cent. I should mention that our own percentage of liberalisation is already 85 per cent.

Before I sit down I wish to say a few words about the effects of the Union on the position of our own country. So far, the Union have carried out two operations—they have passed through two periods. The first covered the three months. July to September, and showed a United Kingdom net surplus for the period of £28,500,000. The second operation was for the month of October, in which the United Kingdom had a net surplus of £75,000,000. Of course, this very large surplus reflects a great many different factors, some of which may prove to be only temporary, and most of which will be already known to your Lordships. I would mention seasonal movements, the rising prices of sterling area commodities, the marked change in the international attitude towards sterling and a great deal of buying of sterling (of which noble Lords who are experts in these matters will no doubt be aware) by foreign traders to cover commitments maturing later on. Our surplus with the Union is calculated on the basis of changes in Central Bank balances, and it therefore reflects all the various factors which influence the demand for sterling abroad by foreign commercial banks and traders. It would accordingly be wrong to assume that we shall go on having surpluses at the same rate as for October.

I should further mention that our cumulative net surplus for the four months from July to October has been £103,000,000, and this has been brought to account in the following way. The first £53,000,000 out of the £103,000,000 surplus—that is the £75,000,000 plus £28,000,000-was used to discharge what is called our "initial debit balance "with the Union. This initial debit balance is very similar to the old "drawing rights," and it means that we had to write off that amount of our surplus with the Union against the receipt of a corresponding amount of so-called "conditional aid" from America. That may sound hard, until your Lordships realise that we obtain in conditional aid what we offer to other countries in this way. The arrangement in question was worked out with certain countries, such as the United Kingdom, which were expected to be in surplus with the Union, and the object was to allow certain countries in the opposite position, such as Greece and Austria, which would be in deficit with the Union, to write off part or all of their deficits. The balance of £50,000,000 of our surplus stands as an undisputable credit in our favour in the books of the Union. I said at the beginning of my speech that these matters are very intricate. I hope that I have met the feeling of the House in trying to deal with the principles of the Union rather than the details of the Bill. If I can provide other information which the House desires, I shall endeavour to do so to the best of my ability. I beg to move that the Bill be now read a second time.

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

4.34 p.m.

LORD RENNELL

My Lords, I am sure I shall be expressing the views of all your Lordships in congratulating the noble Lord, Lord Pakenham, on the extremely lucid explanation he has given of the working of the European Payments Union. It is admittedly a very difficult subject and I hope that the analogies the noble Lord has used (to which I may refer again) will be taken up widely and publicised outside your Lordships' House, so as to give the general public a much clearer idea than a great many people have now about what the Union is and how it works. The first thing I should like to say about the Union, and especially in comment on what the noble Lord, Lord Pakenham, said, is that I venture to think that this is perhaps the most important and constructive piece of international financial and economic machinery we have seen since the end of the war. To my mind, it is far and away the most important of all the arrangements that have been made—and, of course, it could not have arisen without the immense good will of all the Governments that have co-operated in the arrangement, and particularly without the help which the United States Government have given through the various Marshall Aid schemes and arrangements, of which the European Payments Union Agreement is the final outcome up to date. Indeed, in my view, and I believe in the view of everybody else, the European Payments Union could not have been made workable without the solid contribution of the United States Government, particularly in one direction to which I shall refer later.

I should like at this point to express my satisfaction at the domiciling of the clearing arrangements in the Bank of International Settlements, with which I was associated when it first started—indeed, I was one of the four people who opened the books of the Bank. After many years of its existence, during which it has been violently criticised and generally abused as being a useless encumbrance, it is now contributing in a way that no other institution could have contributed to the working of these multi-lateral arrangements. It is now fulfilling the purposes for which it was conceived, and has at long last come into its own. I hope that this is only one of many projects with which the Bank will be associated.

There are one or two points that arise out of the European Payments Union and out of this Bill to which I should like to refer and of which I have given the noble Lord, Lord Pakenham, notice. They are rather complicated points, but they are points on which I believe a certain amount of information is sought by those who try to follow these inter-national proceedings. The noble Lord referred in the first place to the initial balances which were allotted to various countries; and I am particularly glad that in mentioning the debit balance with which this country started he made it clear that it was a debit balance, because it was really in respect of the conditional aid which we were to receive or had received from the United States, and therefore was not just a burden placed on this country rather arbitrarily, as many people have thought.

As a homely analogy, one might take the example of a racecourse. You have in these debit and credit balances, as it were, a handicap placed on all the horses that have been started in the European Payments Union Stakes. It would appear at first sight that the United Kingdom horse had had a great deal of weight attributed to it, and much more than our domestic, financial and economic conditions last year warranted. In that house party, of which the noble Lord spoke, we started with a debit balance on the genial host's book before we commenced playing bridge at all. We started, as a matter of fact, with what is known in this arrangement as a debit balance of 150.000.000 units—a unit is a unit of account. I believe equivalent to the United States dollar. But that, presumably, was fixed by the genial host on his book as our starting handicap, not because we played bridge so well or so much better than anybody else, or, indeed, because we played for higher stakes than other people, but because on two previous occasions we had won from somebody he knew well a sum equivalent to the handicap which he attributed to us in his book.

But the facts of the matter are that, though we started With a debit balance (I propose to stick to units for the moment, because that is the form in which the debits are recorded and we can translate them into money later on) of 150,000.000 units—or dollars, if you like to think of it that way—by the end of September that debit balance had been reduced to 80,000,000 units. Our good play had enabled us to earn 70,000,000 units in the first accounting period. By the end of the second accounting period, that is to say, the end of October, we had turned our debit balance on our host's bridge ledger from minus 150,000,000 to plus 141,000,000 units—that is, in fact, the credit of some £50,000,000 to which the noble Lord referred. That, in itself, is obviously from our point of view a very satisfactory development from the first month's operation of this multilateral period, but it does bring up one or two rather complicated points.

The noble Lord spoke about how these balances were settled—namely, partly in gold, and partly in credits. Under the rules of the Fund, people with credits and people with debits do not either receive or pay until their level, fixed in respect of each individual country, exceeds a certain amount. After that, as the noble Lord said, they receive payment either in gold or in credit, according to certain proportions. Though we have worked off a debit balance and achieved this substantial credit, we have not yet passed the level at which we receive cash, but nevertheless we have a credit share—that is, we have a claim on the Fund of some £50,000,000. Taking, as an analogy, the Fund as a sort of bank, we have a claim on that bank some day to pay us £50,000,000; and when our balance exceeds a certain level we shall be asked by the bank (or be able to call upon the bank to allow us) to take some of it away in gold, dolars or any other currency. In the meanwhile, however, we have a claim, and so long as the Fund is solvent that is a good claim. The solvency of the Fund—though the Fund is terminable in two years—is in effect a guarantee under the Marshall Aid arrangements. Therefore, our claim is a good claim and represents a definite asset.

My first inquiry is whether that credit balance which we have there is taken into the general reserve position in foreign exchange in this country, in respect of which returns are published and made quarterly by the Chancellor of the Exchequer. I am quite clear that when our credit balance exceeds a certain amount, and a proportion of that excess is paid over in gold, that gold will automatically come into the reserve and figure as a tangible asset in the reserve. I am not, however, clear that the credit of the present amount, which has not yet exceeded the margin at which we draw cash, figures in our reserve position. If it does not, I should if possible like to have from the noble Lord an explanation of why it does not, because it seems to me that it is as valid a claim on a solvent body like E.P.U. as a claim on, say, the Federal Reserve system in New York for a credit in dollars which may be lying there—a credit with the Bank of England. If it does appear in the returns, then, of course, it is in the reserve position, the figures of which have already been published. If it does not appear, then the reserve position at any given period when the returns are issued ought, in fact, to be increased, at any rate mentally, by the amount of our credit.

Going back to that reserve position and the developments of the last few months, we know that our reserve position has improved very considerably, and the trend of events in the E.P.U. system entirely bear that out. Moreover, they bear out more of the improvement than is shown by the figures, because though we have a credit of only some £50,000,000 in the Fund at the moment, as the noble Lord, Lord Pakenham, said, we have in fact gained an amount from minus 150,000.000 to plus 141,000,000. In other words, the trend of improvement is far greater than appears from the credit which stands in our name there.

LORD PAKENHAM

I have no desire to interrupt the noble Lord, who is in- teresting us all greatly, but may I suggest deferentially that he says "units" whenever he mentions those figures, because those taking down his words might think he means pounds?

LORD RENNELL

I quite agree. I am talking in units. In other words, we have an increase from minus 150,000,000 units to plus 141,000,000 units in the period. Lest anybody should think that that ought to be interpreted by a greater liberality in our foreign exchange policy, I would hasten to say that I entirely accept that some of these movements and some of this improvement in recent months may be ephemereal; as the noble Lord, Lord Pakenham, has said, it may not last.

Now there have been certain developments which tend to show that strengthening confidence in sterling produced rather a larger flood of payments to this country than would normally be the case. Perhaps it has restored only the position that people wish to hold balances here, which is right and appropriate to a community of this sort and to a country with this economic strength. But it is also true that no deduction can be drawn from that increase in these months to justify our regarding it as a continuing increase on that scale. I do not suppose that we shall really know what is taking place until well after the end of this year, when we shall see the total reserve position, either with or without this credit in E.P.U. But I should like to have that point cleared up when the noble Lord replies to this debate: whether this credit is shown or not.

My second point deals with the Bill, and is rather a technical one. The first clause authorises the Exchange Equalisation Account to carry out transactions under the E.P.U. arrangements—in other words, it authorises the Exchange Equalisation Fund to receive from the Union or to pay to the Union, according to whether we are in credit or in debit. Going back to what I said before, if there is a credit, as there is now, which has not yet achieved the size to justify a payment in gold, there is nevertheless a credit which presumably will be passed to the credit of the Exchange Equalisation Fund, and as such a claim it should figure in the reserve. Your Lordships will note that the Bill specifically authorises the Exchange Equalisation Fund to operate in this connection. It does so authorise the Exchange Equalisation Fund to operate presumably because the Exchange Equalisalion Fund was not authorised to operate previously, and required legislation to do so.

That brings me to my last point, a very complicated one I am afraid. In the second clause of the Bill authority is taken to make advances out of the Civil Contingencies: Fund to the Intra-European Payments Account, which is the account into which conditional aid is received under the Marshall Aid arrangements. The object of this provision is to enable payments to be made to the E.P.U. before the receipt of conditional aid, though to the amount of that aid. There may be delays in one form or another under the conditional aid arrangements which will mean that we do not receive the money until a certain time, but we have to pay E.P.U. ahead of that time. For that purpose, the Bill provides that the Civil Contingencies Fund may make payments to the Intra-European Payments Account in order to enable payments to E.P.U. to be made. When this Bill was discussed in another place the point was made that it did not appear to be appropriate to use the Civil Contingencies Fund for this purpose. The very name suggests that the Fund was set up and created in order to provide for certain civil contingencies. I think it can hardly be said, at least without a considerable stretch of imagination, that payments of the nature I have described could properly be described as civil contingencies in this country.

I am therefore driven to inquire why it was considered necessary to authorise these advances to be made from the Civil Contingencies Fund when it seems to me that it would have been much easier and more appropriate to authorise the Exchange Equalisation Fund, which already does this type of business, to make the advances pending the receipt of the conditional aid under the Marshall Aid arrangements. This would have obviated using a Fund which was never designed for this purpose and the need for a special provision in this Bill to do it. As it is, a special provision has had to be made to enable the Exchange Equalisation Fund to do certain things, and I submit that it would have been easier to authorise the Exchange Equalisation Fund to do this other thing—namely, to make advances pending the receipt of conditional aid.

The conclusion that I have reached from reading the debates in another place, and from examining the position, is that the opposition in another place to the use of the Civil Contingencies Fund appears to have been justified, and I should like to know what arguments can be advanced to show why that was necessary, instead of using the simpler course. Those are the only technical points—and I am afraid they are rather technical points—which I wish to raise on this Bill. It is not with any view to criticising the Bill or the arrangement, which of course has the wholehearted support of all my friends on this side of the House, and which has, indeed, I think, received more acclamation and support from informed opinion in this country than any other arrangement of the same sort that has been made since the end of the war. We must hope that all members of the house party, when they play bridge in the course of the next few years, play their cards with sufficient prudence and modesty not to run into serious overdrafts with their genial host, because that is the only thing which might break down the machine and might make the genial host a little less enthusiastic about continuing a multilateral clearing of this nature when the period of two years comes to an end.

4.55 p.m.

LORD PAKENHAM

My Lords, I should like to express my own thanks, and also, I know, these of my right honourable friend the Chancellor of the Exchequer to the noble Lord, to his noble friends, and to the House generally for the cordial reception that this Bill has received. I am aware that the noble Lord, Lord Rennell has put down a Motion about the whole form of Government accounts, and I do not know whether that will enable him to develop some of these themes still further.

LORD RENNELL

It depends on the noble Lord's answer to-day.

LORD PAKENHAM

AS the noble Lord has put down that Motion I feel sure nothing I say to-day will deter him from exploring some of those rather abstruse avenues. I will therefore ask him to forgive me if I speak briefly to-day on these points. The first question he put to me was about the credits with E.P.U., and the question of whether those credits would figure in our reserves. He is, of course, right in saying that the gold figures would, but in the view of our experts the credits that the noble Lord had in mind are akin to other types of short or long-term investments overseas, and the analysis of these transactions, together with the operations on the other side of the account, resulting in changes in our external liabilities, will be set out in summary form in the next Economic Survey and in the half-yearly Balance of Payments White Paper. We shall continue to publish figures of the United Kingdom position at each monthly E.P.U. Statement.

The noble Lord may be under a misapprehension in regard to these credit claims on E.P.U. being equivalent to gold. That is not so. I hope the E.P.U. will not be wound up, but if it were wound up our credit claims would be paid off, partly perhaps in dollars but mostly in claims on the individual members, who are to a great extent non-dollar countries, so that one cannot treat credit claims on non-dollar countries as if they were in fact equivalent to gold or dollars. I am glad to think that the noble Lord criticises us for underestimating our own achievements. If he is finding any fault with our accounting it is that we are not really puffing out our chests sufficiently. It is the right sort of criticism, and the type that will always be welcome.

Lord Rennell raised a still more technical point when he asked why the Exchange Equalisation Account could not be used for certain purposes, instead of the Civil Contingencies Fund. Here I doubt whether I shall convince him across the Table, but I must put on record the considered reply of the Government. I should make it plain that the idea the noble Lord had in mind, that of using the Exchange Equalisation Account, was considered—and I believe considered thoroughly—but the other procedure was found to be necessary, and indeed was regarded as the only proper procedure. The functions of the Exchange Equalisation Account are defined in the Finance Acts of 1932 and 1946 as being the investment of its funds in securities or in the purchase of gold for purposes laid down in those Acts. Therefore, under those Acts we cannot simply use the Exchange Equalisation Account to make advances to what is another sterling account. It is not regarded as a Contingency Fund, and it was therefore necessary to bring in the Civil Contingencies Fund, which of course is. This follows the exact precedent of the American Aid and European Payments Act, 1949. I do not expect to convert the noble Lord with those few words, but I am always ready to meet him with my advisers, if he wishes. I can assure him that this matter was looked into, and the procedure adopted was found to be not only convenient but, in the circumstances, the proper one. I am extremely grateful to the noble Lord for what he has said.

On Question, Bill read 2a, and committed to a Committee of the Whole House.