HL Deb 05 March 1959 vol 214 cc817-28

3.30 p.m.

Order of the Day for the Second Reading read.

THE EARL OF DUNDEE

My Lords the purpose of this Bill is to carry out, on the part of the United Kingdom, the agreements which were arrived at last December at New Delhi at the thirteenth Annual Meeting of the Governors of the International Monetary Fund, which was attended by my right honourable friend the Chancellor of the Exchequer. It was decided that it would be desirable to increase the resources of the International Monetary Fund by 50 per cent. and that each member of the Fund should be invited to pay an increased contribution—50 per cent. more than the present one. It was also decided that it would be a good thing to increase the resources of the International Bank for Reconstruction and Development by 100 per cent; that its share capital, therefore, should be doubled; and that the liability of each shareholder member of the International Bank should be increased by 100 per cent.

The contribution of the United Kingdom, in each case, was 1,300 million dollars—that was our contribution to the International Monetary Fund; 1,300 million dollars was our holding—our liability—in the International Bank. So that if the resolutions taken at New Delhi are given effect to, our contribution to the International Monetary Fund will be increased by 650 million dollars, equivalent to £232 million in sterling, while our liability as a shareholder of the International Bank will be increased by 1,300 million dollars; that is to say, £464 million.

The reasons why it was considered desirable to strengthen the resources of the Fund and of the Bank in this way are fully set out in the White Paper, Command 652, which was published on February 3. Both the White Paper and this Bill in Clause 1 (a) use the word "subscription" when referring to the contribution payable to the International Monetary Fund. Subsection (a) provides that the proposed increase of the quota of the United Kingdom—that is to say, subscriptions in value 650 million U.S. dollars—shall be paid into the Fund. Perhaps the word "subscription" may be slightly misleading. The position is that of this 650 million dollars, or £232 million, one quarter—25 per cent.—is payable in gold. That is 162½ million dollars—or £58 million—worth of gold. That is the only really effective payment with which we are concerned in this Bill. Fifty-eight million pounds worth of gold will be transferred from our ownership to the ownership of the International Monetary Fund, and to that extent our own gold reserves will be depleted.

The remainder, the other 75 per cent. of the 650 million dollars—that is, 487½ million dollars or £174 million—is payable in sterling currency, but in fact it is immediately given back in the form of an interest-free loan, and the only circumstances in which any part of this interest-free loan might have to be repaid would be if other members of the International Monetary Fund should exercise their drawing rights, not in dollars but in sterling, to an extent greater than the amount of the sterling reserves already held by the International Monetary Fund. Noble Lords will see in the table of figures on page 13 of the White Paper, that the existing reserves of sterling currency already held by the International Monetary Fund amount to 1,618 million dollars; that is, £578 million. It is very difficult to imagine circumstances in which any members of the Fund would wish to exercise their drawing rights in sterling to anything like that amount, unless sterling were to become so strong that the present relative position of sterling and dollar in international monetary affairs were to be entirely reversed. Therefore, the possibility of our being called upon to pay any part of this interest-free loan of £174 million is extremely remote. But we are doing this as our part in the general agreement arrived at last December, among all members of the Fund, to incease their present contributions by 50 per cent.

The advantages Which we gain in return are, first, that our drawing rights are increased. They are increased by double the amount of our additional contributions; that is to say, by 1,300 million dollars, less the amount of the interest-free loan of 487½ million dollars to which I have just referred. That is to say, our drawing rights on the Fund are increased by 812½ million dollars, which is five times the amount of the only real payment we are making—£58 million or 162½ million dollars—into the reserves of the International Monetary Fund. And you may also see that there is some indirect advantage, in this sense: that increasing the resources of the International Monetary Fund will, no doubt, result in greater liquidity in international exchange. And that, I should think, will be to the advantage of British commerce.

The next subsection, subsection (b), deals with our increased liability in respect of the International Bank for Reconstruction and Development. It provides for such amounts as may become payable to the International Bank for Reconstruction and Development in respect of the United Kingdom shares in the proposed increase of capital stock; that is to say, amounts not exceeding the equivalent of 1,300 million U.S. dollars—£464 million—thus doubling our existing liability. But here there is certainly no question of any immediate payment, and probably no prospect of any payment at any time. It is simply an underwriting transaction; it is a guarantee. Of the capital originally authorised, only 20 per cent. has been called up; the remaining 80 per cent. has not been called up. And in respect of this new liability, which in our case amounts to 1,300 million dollars, your Lordships will see on page 29 of the White Paper, Resolution (b), by the Board of Governors, that this increase—that is, a total increase of 10,000 million dollars in authorised capital stock and subscriptions thereto—shall be called on only when required to meet obligations of the Bank for funds borrowed or on loan guaranteed by them, and not for use by the Bank in its lending activity or for administrative expenses. The far greater part of the Bank's lending activities are financed by money which the Bank borrows and not by lending the money which is subscribed by its shareholders.

The only circumstances in which we could be called on to discharge any part of this new liability of 1,300 million dollars would be if someone to whom the Bank had lent money for the purpose of development were to default, which has never happened so far. Of course, in any case, our liability would only be proportionate to the amount of our total holding in the shares of the International Bank. The advantages which we derive from this increase in the Bank's resources are that it will broaden the basis of the Bank's credit and enable it to raise more money for the purpose of financing the development of under-developed countries, which I think your Lordships will all agree is to our interest, both commercially and politically.

I am sure your Lordships will not wish me to go into any details concerning the loans which the Bank has already given, but may I give one general figure? Up to last December the total amount of loans to backward countries approved from the Bank amounted to 4,200 million dollars, of which exactly one-third, that is, 1,400 million dollars, was to countries which are members of the British Commonwealth of Nations. The Bill is a certified Money Bill and it has passed through all its stages in another place with the general agreement of all Parties. I beg to move that the Bill be now read a second time.

Moved, That the Bill be now read 2a.—(The Earl of Dundee.)

3.45 p.m.

LORD PETHICK-LAWRENCE

My Lords, I do not think it will come as a surprise to the noble Earl who has moved the Second Reading, or to Members who sit behind him, when I say that we on this side of the House have no opposition to offer to this Bill, but, as I shall show presently, quite the contrary. Your Lordships will remember that a few weeks ago we had a discussion in which I pointed out that our objection to what was then being done was on the ground that it was a gamble in liquidity. I am not going to reopen that question in the slightest degree to-day, except to say this: that so far as we understand this Bill, part of it at any rate is to give greater liquidity, and therefore, certainly for that reason, it is welcome to those of us who sit on this side of the House, as no doubt it is to the majority of noble Lords opposite and to members of the Government.

Before I go into that point in greater detail, I should like to make one general observation. The position of sterling at the present time is for the moment reasonably satisfactory. The value of sterling in exchange is above the medium mark in the gold points; and that is a proof that sterling is respected and is standing in good repute. The danger is that a time may come when circumstances might alter the position, and I want to make this short digression to illustrate my point. We in this country have been for some time stagnant. We have quite a large number of unemployed—not a great number, but much too many—and in other countries, particularly in the United States, there is almost a recession; in the United States there is a great deal of unemployment. We on both sides of the House hope, as do people not only in this country but in other parts of the world, that this recession and stagnation, in so far as it exists, will give place to prosperity and expansion. Of course nothing is better than that. But I want your Lordships to realise that it is when a private business is contracting that it is flush with money, and that when it is expanding is the time when it gets short of cash. That is equally true of a nation: when we are not doing much business we do not need to have a great many imports; but as soon as we begin to expand, then before we get the benefit of the credits owing for our exports we shall have to import on a considerably greater scale than we do at the present time. Therefore, for that reason, we shall have a draw on our resources: not because we are not prosperous, but just because we are expanding and are more prosperous than we were in days gone by.

That is not the only point. At the present time, owing to the recession and stagnation, the countries that supply raw materials, the primary producers, are not able to sell all their products. As soon as prosperity begins to return, both here and in the United States, there will be much greater demand on the primary products of the world, and therefore those primary producers will be able to get a bigger price. Therefore the terms of trade, which have in the last few years gone so remarkably in favour of this country, will turn, to some extent—I think advantageously from the world point of view, as a whole—upward, instead of downward, as they have been going all this time. For both those reasons there will be a greater strain upon our exchange in this country than there has been in recent times: a strain due to factors that are by no means undesirable but which will produce that effect. That is why I pressed so strongly the other day that we must be careful and must not measure the future position with regard to liquidity by the comparatively favourable position which sterling holds at the present time.

It is in the light of that background that I want to examine this Bill. The Bill divides itself into two parts. First of all, there is the increase in the quota by 50 per cent. of the International Monetary Fund. It is quite true, as the noble Earl, naturally quite correctly, pointed out, that that is going to involve us in a direct and immediate payment of £58 million out of our slender reserves in order to pay our share of that quota. To that extent, of course, that reduces our immediate reserves. But we are going to get far more in the more remote reserves, because of our ability to draw, if necessary, upon the International Monetary Fund. Therefore, though our immediate reserves will be depleted to the tune of £58 million, our second line reserves will be considerably increased. Therefore I, for my part—and my Party are fully in support of the view that I am stating—support this Bill, because, looking a little wider afield than the immediate cash in the till, looking to reserves, we think it is a good thing from the point of view of this country that we should have this increase in the subsidiary reserves which are represented by the holding in the International Monetary Fund.

Further, I quite agree with what the noble Earl said about this being not merely a selfish point of view. Not merely is it to the immediate advantage of this country, but also, as other countries throughout the world are dependent upon international trade, it is a good thing to have behind every one of them the possibility to draw on a larger amount in the International Monetary Fund, because that will promote the trade of the world, and that will reflect itself in advantage to this country, because our country is, par excellence, a trading country. If the trade of the world goes up, that tends to promote the position here at home. That is as far as the International Monetary Fund is concerned.

The position with regard to the International Bank is slightly different, because the International Bank does not as a rule lend money directly to Governments, though I think we did get some credit from them recently at the time when we were in some distress. But it is not its main object to lend money to Governments. Its purpose is to lend money for the development of industrial projects throughout the world. Also, unlike the International Monetary Fund, it is not supposed to lend out the money that has been paid by Governments. Its purpose is to lend the money which it borrows from other people. It is rather like a bank in this country which has shareholders who supply the background of the bank's finances, but which trades in what it borrows in the shape of deposits from its depositors. It lends those out to other people. The object of the funds which the shareholders provide is to be an insurance against contingencies. If some of the advances tumble because they are insecure, and things go wrong, then there is a possibility of drawing on the funds of the shareholders.

The International Bank operates in more or less the same way. Therefore, so far as the increase of 100 per cent. in the quota towards the shareholding of the International Bank is concerned, I do not think that that could be said in any immediate, direct sense to be promotion of greater liquidity. It is not exactly a reserve that is of any immediate advantage to us in our reserves position. But it is an advantage to the trade of the world. It helps countries who are in need of capital to develop their resources; and because it is that, it is not only an advantage to humanity as a whole but an advantage to this country which, by virtue of its central position, has not only a moral but a financial interest in the prosperity of the world.

Further than that, we are not merely considering our position as the United Kingdom in these matters; we are considering it to a large extent as the centre of the sterling area. Many countries such as India, Ceylon and others, who are going to benefit by the increased capital which is put into the International Bank, are countries which belong to the sterling area, and their prosperity is an advantage for themselves; but it also advantages this country, because we, being the head of the sterling area, benefit by what is good for them.

On both the separate proposals of this Bill we on this side of the House are in agreement with the Government. We support the Government over the increase in the quota of the International Monetary Fund, because we think that that will increase the liquidity and give us a second reserve behind our immediate cash reserves in gold and foreign exchange. We support the second part, which is for the purpose of increasing the capital behind the International Bank, because we think that it all tends to increase the general flow of trade and capital development throughout the world, and particularly throughout the sterling area. In those circumstances, we regard both sections of this Bill as an advantage, and my noble friends on this side of the House will certainly not take any exception to it. On the contrary, we fully support the passage of the Bill.

3.57 p.m.

LORD HAWKE

My Lords, I think that nearly every one of us will support practically every word said by the noble Lord, Lord Pethick-Lawrence on this Bill. As your Lordships are aware, the International Monetary Fund has the most complicated set of rules laid out in the Articles of Agreement as laid down in the final Act of Bretton Woods. One wonders whether it was intended to function on a rather more day-to-day basis than has in fact turned out to be the case. Now it has become the sort of long-stop of the Foreign Exchange market—the last resort for members in need of foreign exchange—with a quota of one-quarter in gold and three-quarters in paper, of which a quarter of the quota can be drawn in any one year until the Fund holds the amount of the members' currency equal to double his quota. Curiously enough, it was not intended to deal with capital movements; but in practice, of course, who can distinguish, when there is a run on currency, what is a capital movement and what is not? So in practice the Fund has turned a blind eye to this particular Article.

Other Articles provide against discriminatory practices. In fact, so far as I can make out, no member can practise discrimination unless (a) it is against a currency which is scarce, or (b) that member considers himself to be in a transitional stage from the war period, or (c) he cannot balance his foreign exchange accounts without discrimination. These three exceptions cover a remarkably wide field, and when one surveys the field I think one realises that a great many members take advantage of one, other or all of them to practise discrimination. It is not a very great distance from discrimination against a foreign currency to discrimination in turbo-generators, but one must understand that it is very difficult for the Fund to get its rules entirely obeyed to the letter and the spirit, because discipline by the Fund does, in fact, involve something in the nature of a diminution of sovereignty. Indeed, one can imagine a situation when, to put its affairs in order at the behest of the Fund, the Government of a member country might well fall; and that is a very stern test of discipline, as we all know.

It leads one to wonder, when one sees the wealth of exceptions to the rule, whether a fixed exchange rate with a very narrow fluctuation, as provided for in the Fund, is really compatible with freedom of exchange for a vast number of countries in this world. I myself feel that there would be considerable advantages in allowing a wider margin of fluctuation After all, the Fund does provide that upon due notice and with the permission of the Fund a member can alter the value of his currency by 10 per cent. But if, for example, the value of currencies were allowed to fluctuate within certain limits—say 5 per cent. to 10 per cent.—I fed that that might have great advantages in enabling some of those countries to submit themselves to the necessary discipline of the Fund.

After all, there are perfectly good precedents. I myself have spent years trading in a currency, the rupee, which at times had a considerable variation; and even in what were regarded as the more fixed times the fluctuation, so far as I remember, was appreciably more than that allowed under the International Monetary Fund. I have an idea that the Canadian dollar, too, has fluctuated more than the 1 per cent. each way allowed. I feel that if one could make it a little easier for those countries it would be more easy to persuade them to give up some of their more reprehensible practices, such as multi-exchange rates and so on. In fact their position is an extremely difficult one at the moment, pledged to fixed exchange rates, to freedom of exchange, and to various limitations on tariffs by G.A.T.T. and so on. To some countries in the world, which I will not mention, the triple discipline is quite impossible and quite intolerable.

But, with all its difficulties, the Fund certainly provides us with some help. I do not think it is really intended to provide for the point which the noble Lord, Lord Pethick-Lawrence, rightly made, of the strain on the reserves caused by the rise of normal trading. I have the feeling that that is intended to be carried by the country's normal monetary reserves and that the Fund comes in, as I described it before, as a sort of long-stop to prevent disaster. I am afraid that it was rather difficult for me to follow the White Paper, the Articles of Association and my noble friend who moved the Bill, so I will not mention the figures that we can get out of it.

But there is another Article, Article V, Section 4, which does allow the Fund to accept collateral, and I wonder whether any member has ever offered them collateral—collateral being gold, silver, securities, or other acceptable assets. Has any country offered them bags of coffee or tons of wheat or tons of copper? Has a silver-producing country tried to "raise the wind" on silver? It would be interesting to know whether that Article has ever been called into use.

I am glad to see the Fund is putting up some of the quotas of the countries which have made such great industrial progress. I still wonder whether Germany, at 1,050 million dollars, is correctly placed as against ourselves, at 1,950 million. I should have thought something more could have been got out of them.

I always wondered whether this particular rather difficult international operation was inflationary or not. I am sure the noble Lord, Lord Pethick-Lawrence, would know the answer, but it seems to me that if countries place at the disposal of the Fund what, in effect, are large quantities of paper money, if that paper money is ever turned into purchasing power by being sold to another member to use in the original country, unless the Government of that country finds some way, by taxation or by borrowing, to remove an equivalent amount of purchasing power then the operation must be inflationary. Sometimes one welcomes the provision of greater reserves without at the same time thinking of the aftermath, the "morning after", and unfortunately one has to pay back these drawings. I always have a personal view how much better it would be if the United States would consent to raise the buying power of gold: if they did, a great deal of what we are discussing now would become unnecessary, because that alone would enable the chips for settling the international game of trade to be of the right size compared with the trade.

When we come to the Bank, I think we must all agree that the Bank is a most excellent institution, because it has the ability to place in any market in the world fixed interest bonds with people who for the moment are willing to lend on fixed interest. There are not many countries in the world where that can be done at the moment at a reasonable rate of interest and, moreover, in re-lending those sums the Bank does not tie the money to any particular country as to the placing of orders. I wonder whether this paper operation was strictly necessary. I should have thought that the status and credit of the International Bank was so strong that it would be hardly necessary to go through the motions that we do now in order to provide what in effect is a large slice of uncalled capital.

The Bank itself is a most valuable factor in imposing discipline on borrowers. We know that in the past, particularly in South America, the only deterrent to complete financial profligacy was the thought that they might want to get another loan. The Bank is now going to replace what London and New York were in the past, and with very many emerging countries with no great tradition of financial responsibility I am sure that the Bank will be a most valuable adviser and monitor. In fact I should expect those people to take from the International Bank advice which they would certainly not take from London or New York. For all those reasons I heartily support both parts of this Bill.

On Question, Bill read 2a: Committee negatived.