§ 3.28 p.m.
§ Order of the Day for the Second Reading read.138
§ LORD SHEPHERD
My Lords, I beg to move that this Bill be read a second time. I do not wish to detain the House unnecessarily over the details of the Bill or the Executive Director's Report, which can be found in Command Paper 2675. I am sure the House will agree that this document sets out the subject with great clarity, taking into account its very complicated ramifications. The Bill is simple; it consists of one clause. The House will see that it empowers the payment to the International Monetary Fund of £175 million as our subscription, which represents an increase of 25 per cent. on our present quota and subscription.
I think the greatest significance of this Bill lies in the fact that it is yet another step by this country in international cooperation. It is interesting to note that the International Monetary Fund now consists of 103 nations. The noble Lord, Lord Blackford, in his remarks, referred to the serious times of the 1930s. Certainly they were times of gravity, but I am quite sure that those who watch international trade would see a significant difference between conditions then and now. In those days we had what might be called international financial anarchy. To-day, instead of competition between nations, and countries taking particular actions in their own interests without any regard to others, we have these 103 nations who have come together to see whether, by discussion and by agreement, they can find some way of stabilising and developing world trade.
I am quite sure the House will be interested not so much in the Bill itself but in how the Government see the present situation in world liquidity. The position of the United Kingdom has been for some time that while there is no shortage of liquidity as yet, there are several indications that a shortage might arise. Mr. Maudling, when he was Chancellor of the Exchequer, was among the first to bring this to the attention of the world at the meeting of the International Monetary Fund in 1962, when he also contributed some ideas towards a solution. But the world was not then convinced, and I fear is not yet fully convinced, that action is necessary. Since then, the indications that more liquidity may he needed and that some changes in the system may be required have become clearer to us and also to some of our 139 friends, as has also the increased urgency; but there does not appear to be universal agreement on this problem. No statistical proof is possible in these matters, but trends and broad relationships are discernible and it seems clear to us, and indeed to many others, that if world trade is to go on growing without inhibition on this account, some special measures to increase liquidity will be required.
I think a distinction should be drawn here. The actual financing of trade which is done through the commercial banks and the like by the traders themselves is one thing; liquidity, about which we are now talking, is needed by the Governments to finance the swings in their overall balance of payments which arise from the fact that in practice countries can seldom keep in balance on external account. Liquidity provides the element of flexibility and allows time for the imbalance to be corrected without recourse to harmful measures. I am quite sure we should all agree that the situation being what it is, it would be wrong for nations now to take unilateral action. These balance of payments swings are growing larger as trade expands and capital movements become less restricted and are likely to last longer, because domestic considerations, as well as the international obligations to which I have referred, make Governments far more hesitant than they used to be over taking the more violent and unneighbourly measures which often have the quickest effect on a deficit.
There are two further pointers of more immediacy. It now seems likely that the growth in world trade may slow down a little next year. Paradoxically, perhaps, at first sight, this does not, in our view, make the need for providing for a further increase in liquidity less urgent: rather the reverse. In the first place trade will still be expanding, if not so fast; and in the second place it is not the volume of trade itself which the liquidity finances, but rather the increasing swings in balances of payments; and it would be extremely unfortunate if a less favourable trade position were to be further worsened through the inhibiting effect of a lack of international liquidity upon national policies of growth and expansion. The second pointer is, of course, the considerable success the 140 United States authorities are achieving in reducing their balance of payments deficit. This is already reducing the outflow of dollars from the United States which has provided a very large proportion of the supply of new liquidity to the world for many years.
The American measures have another aspect which I am sure will be of interest to the House, and I should like to spend a few moments on that, if I may. This is the effect on the United Kingdom's own balance-of-payments position. President Johnson's programme included four main measures: the extension of the interest equalisation tax; the request to banks to limit their long and short term lending abroad; the voluntary limitation upon overseas investment by American corporations; and, lastly, the appeal to American corporations operating abroad to increase their remittances home. It is still too early to make an accurate assessment of the effects of this programme upon the United Kingdom. However, the figure for inward direct investment in the United Kingdom for the first quarter of this year was substantially lower than the average quarterly rate of last year, namely £13 million, excluding oil, as compared with £45 million. This is likely to have been caused in part by the response of American corporations with United Kingdom subsidiaries to the United States Administration's request for an increase in their remittance home of profits which might otherwise have been invested here. We believe that this reduction in investment is likely to have been temporary, and preliminary evidence suggests that outward remittances from the United Kingdom may have dropped back to a more normal level in the second quarter.
Nor do we feel any great cause for alarm at the United States programme in general, the reasons for which we entirely understand and with which we sympathise. The American banks have been asked to take the present position of the United Kingdom into consideration when they play their part, and noble Lords may also have noticed from the American President's original statement that he wished to avoid "beggar thy neighbour" effects.
To return to my main theme of liquidity. Agreement was reached last year both in the "Group of Ten" industrial countries which are members of 141 the International Monetary Fund's borrowing scheme, and also in the Fund, that quotas should be generally increased; and when the Executive Board came to work this out in detail 25 per cent. was found to be the figure commanding almost universal support. We ourselves would have seen advantage in a higher figure than 25 per cent. for the general increase. But others favoured less because they did not, and do not, agree with our analysis of a likely liquidity shortage, and to press for more would have aggravated the problem of finding ways to reduce the effect of the obligation to pay in gold one quarter of the subscription associated with any quota increase.
This obligation can, in fact, go some way to offset the increase in liquidity which quota increases are designed to provide, and it hits particularly hard the reserve centres—the United States and ourselves—to whom many other member countries holding dollars and sterling naturally turn in order to buy the gold they need to pay their own subscriptions. The Command Paper shows that a way was in fact devised and agreed for providing relief from the gold subscriptions impact. This, as I am sure noble Lords who have read it will agree, although very clearly presented, is an arrangement of extraordinary complexity. If my right honourable friend the Chancellor could ask for the sympathy of the House and receive it, I am quite sure that I can get it for the asking, because this is a very complex matter.
But, perhaps more to the point, in the case of the United Kingdom this can in effect be spread over five years. We are spreading over five years the burden of paying our own gold subscription of some £44 million, and this should relieve us for quite a number of years of the greater part of a further approximately equivalent burden of selling gold to other Fund members who need it for paying their own subscriptions. As is explained in the Explanatory Memorandum to the Bill, which also recounts the history of the United Kingdom quota, the three-quarters of our subscription which is payable in sterling has no immediate effect upon us at all. We played a prominent part in bringing these quota increases about and we welcome them as a very useful first step towards reinforcing the world liquidity position and as providing 142 a more secure base upon which the international discussions can continue.
The international discussions continue, and will continue, and the main questions under examination now are what further provision should be made for increasing the supply of liquidity when occasion demands, and what changes should be made in the international monetary system. Another result of the deliberations of the Group of Ten last year, besides their support for the Fund quota increase, was the setting up by them of a group of experts from their ten countries under the chairmanship of Signor Ossola of the Bank of Italy. The task of this group was to study possible ways of providing more owned reserves. I use the phrase "owned reserves" as distinct from credit facilities, the other half of the liquidity spectrum which is already being somewhat reinforced by the Fund quota increase.
The Chancellor of the Exchequer is announcing to-day that the ten countries have decided that this report should be published on August 10. I understand it is a technical analysis of the various possibilities. I do not expect that we shall find in it references to all the well-known plans for solving the liquidity problem associated with the names of well-known leading economists, but I think that the group have made a thorough study of all the arrangements which were thrown up both in their discussions and in the Group of Ten's earlier discussions last year and which seemed to hold out any prospects of being negotiable. It will also confirm what we already know, that there is a wide divergence of view on these matters.
We recognise that it cannot be any longer regarded as entirely satisfactory to depend indefinitely for owned reserves on the limited and uncertain amount of new gold produced in the world and on the supply of reserve currencies which must derive from deficits in the balance of payments of the two reserve centres. We shall not, therefore, hesitate to look for more rational means of organising the world liquidity system. There is, however, no basic agreement on the nature or the consequences of the remedies. It would not help to achieve success in the continuing international discussions, for Government spokesmen to adopt rigid positions about our own views or to analyse too closely or to criticise the 143 position of other countries. The Chancellor of the Exchequer is extremely conscious of this and of the abundance of plans and solutions that now lie in the field. He recognises that if some agreement can be reached on certain basic issues, technical means of implementing the agreement will be available in plenty. It is for those reasons that he has not—and he still takes this view—publicly propounded a detailed solution of his own. He has, however, been in close touch with several of his opposite numbers in other countries, particularly France and the United States, and he has endeavoured, and will continue to endeavour, to search out any possibility of common ground.
The United States has taken a recent initiative by announcing its readiness to attend a world monetary conference and to try to carry the discussions further. Mr. Fowler, the Secretary of the United States Treasury, was careful to say thata reasonable certainty of measurable progress through prior agreement on basic pointsought to precede any meeting, and Her Majesty's Government thoroughly agree with him. It may be noted that insistence on some prior agreement was one of the elements in the French comment on this initiative which was widely reported, and perhaps somewhat exaggerated, as a rejection of the American proposal.
For reasons I have already explained I do not want to go too closely into the details of our own position. We do not shrink from having a basic discussion about the rôle of the reserve currencies, the possibilities of future development and to what extent, if any, the reserve currencies may need to be supplemented by other international units or drawing rights or whatever else may prove to command the greatest measure of common agreement among the nations. And this discussion is bound to involve a discussion of the future rôle of the International Monetary Fund. Her Majesty's Government believe, and I think noble Lords opposite will agree, that the International Monetary Fund has proved a very great success. It has proved flexible and pliant in meeting changing world needs. We think that the International Monetary Fund has deservedly established its central position in the world's payments system and has shown itself ready and capable of adapt 144 ing its policies and practices to changing requirements. We therefore approach any discussion about the system with a strong and reasoned preference for reaching a solution which is built upon or is clearly linked with the Fund.
Quite apart from the disadvantage of setting up a second quite separate centre of influence, the international payments system is a field where the confidence of the participants is vital, and this progress towards reasoned change can be made only by agreement. The Government have, therefore, to negotiate patiently, flexibly, but with persistence, towards an agreement to build up on the best parts of the existing system. The next step is a meeting in August of the Group of Ten and thereafter the Annual Meeting of the International Monetary Fund in Washington at the end of September. It will be the aim of Her Majesty's Government to assist in these discussions in every possible way.
In conclusion, may I add my tribute—and I am sure the whole House will join me in doing so—to M. Schweitzer, the Head of the International Monetary Fund, and to all his staff who have given such tremendous help, not only to ourselves but to many of the smaller nations who have come in need. They have deserved well of our support and I hope that we shall continue to give it. I beg to move.
§ Moved, That the Bill be now read 2ª. —(Lord Shepherd.)
§ 3.50 p.m.
§ THE EARL OF DUNDEE
My Lords, this is a very small Bill about a very big subject. It will do a little good, but it is pitifully inadequate to meet the requirements of trade in the Free World. I think it would be wrong to blame Her Majesty's Government for the insufficiency of this measure, because I have no doubt that they have tried, and will try, to do more.
I think that most British Governments have been much more alive than others to the need for greater liquidity, and we have managed to get some improvements made in the system, some of them multilateral and some unilateral. In 1959, we had an increase of 50 per cent. in the quotas of the International Monetary Fund, and later, under Mr. Maudling, we had special unilateral arrangements 145 with the United States and with Switzerland; and we also had what is called the General Agreement to Borrow among ten of the leading trading countries of the world. But we have always had to contend against a massive deadweight of inertia, indifference and incomprehension, often combined with short-sighted economic nationalism. The situation has not been improved by the attitude of some of the Central Banks of the world, who have an obstinate fear that better international liquidity will mean more inflation and more improvidence in national spending. They are often inclined to think that individual nations should behave like thrifty and industrious apprentices operating on a financial shoestring, gradually accumulating a little more of the surplus every year and carefully balancing their accounts.
When we talk about this subject collectively, we all agree at once that it would be a mathematical impossibility for all trading countries to have a surplus in their balance of payments at the same time, and that if there were a rule that all trading accounts in the world must exactly balance, and if that could be enforced, then trade would be almost stagnant. But when individual countries consider their own position from their own point of view, they still go on talking as if these impossible, or at least extremely undesirable, economic objectives were the height of economic virtue.
Until last year, the United States of America had had an adverse balance of payments for six years, averaging 3,500 million dollars each year. At the beginning of last year their accumulated adverse balance of payments was no less than 21,000 billion dollars—to the great benefit of the rest of the world, and without any visible adverse effects on the buoyant, booming prosperity of the United States. Now, in the last year, the United States have been taking steps to correct their balance of payments, and they have been congratulated by the financial authorities of the world for taking what is regarded as a most praiseworthy action. But how have they done it? By reducing their investments abroad and by reducing their imports. Is that going to help world trade? On the contrary, it is so likely to lead to a severe depression in world trade that I think that is a reason why the American Government has now agreed with the 146 Chancellor of the Exchequer to have urgent discussions in the immediate future on this subject of international liquidity.
If your Lordships take our own humble little problem, our trifling little deficit of £745 million last year, and if you will look at the recent Report of the O.E.C.D., you will see that that is made up as to about half by £370 million in British investments overseas. Of the other half, I think that more than £200 million consists in the cost of defending the Free World by unrequited exports—something which is not done by any other countries, whose financial authorities are now criticising us, except the United States. The remainder of the deficit is more than made up by the cost of stockpiling and importing material for domestic investment, in order to achieve the national I economic growth target of 4 per cent., which was achieved last year, but which has now been reduced to 3½ per cent., a figure that will probably not be achieved in 1966.
Contrast that £745 million with our gross national product of more than £25,000 million and our foreign investments of over £11,000 million. Supposing there were a prosperous small tradesman who had a turnover of £25,000 a year and a portfolio of investments amounting to £11,000 outside his own business, which would probably be worth £100,000 or more, would you not consider it really ridiculous if he had thought himself bound to start cutting down his production and raising prices to his customers because he had an overdraft of £745 at the bank? That is what we are doing internationally. The reason is that there is not enough liquidity internationally to provide a sensible base for world trade.
On this Bill I am not going to discuss the merits of any of the measures, such as the import surcharge (we may discuss that to-morrow) which have been taken. But I would say that measures like an import surcharge are, in effect, the penalty which the rest of the world has to pay for not agreeing to a sensible policy of international liquidity. When we cut down credit and pursue disinflationary policies, when we stop lending money and restrict imports, all other countries with whom we trade tell us that we are un-neighbourly. They say "We cannot prosper unless you take our 147 imports, and we must have your capital in order to develop. You are doing a most un-neighbourly thing." But when we do invest our money in their country, and when we do take their imports, all their financial authorities say You are most improvident. We have no longer any confidence in sterling."
We understand that the noble Lord, Lord Shepherd, cannot tell us much about any international discussions which we hope are soon to take place on this subject, in August and September. But how much more liquidity do we want? The noble Lord implied what I was going to say, that we must go to these discussions ready to agree to any solution which we find to be practicable, even though it may not necessarily be ideal. I do not know whether or not it will be a waste of time to talk about the world price of gold, because I do not know for how long the American Government consider themselves bound by the pledge—I think the most misguided pledge—which they gave a few years ago, that the price of gold would not be raised. Ideally, it would probably be much more sensible that we should arrange our world monetary affairs without having to dig a whole lot of metal out of the earth and put it into the vaults of a whole lot of banks. But so long as human beings insist on using this particular metallic substance as a credit base, it cannot perform its function properly if it is artificially undervalued to the extent of about one-half, as it is now.
In order to do its job properly the price of gold ought to be doubled, and, with great respect to our American friends and others, I must say that the reasons given against doing that appear to me to be intellectually contemptible. One reason was that it would help South Africa and Russia, which are both wicked countries. Is it not rather absurd to hamstring the whole of international trade in order to avoid paying a little more for the exports of two countries of whose internal policies we disapprove? The other reason was that, in the opinion of some people, this would involve a devaluation of the dollar. Of course it would do nothing of the kind. To raise the price of gold to its true natural level would mean an alteration, not in relation to the dollar, but in relation to money all 148 over the world. It is no more devaluation than a rise in the price in rubber or wheat could be.
What has happened is that all currencies have already been devalued 50 per cent. in relation to gold, but this is not officially recognised. The fact that it is not recognised is a great hindrance to the use of gold in fulfilling its functions as an international credit base. Whether we can do anything or not about gold, we must get more credit liquidity as well, as the noble Lord, Lord Shepherd, said, preferably through the International Monetary Fund. It should be done either by creating some entirely new unit of international currency or perhaps by increasing the quotas of members of the International Monetary Fund—not one every five or six years, but regularly every year in order to build up a vastly greater quantity of reserves.
It has been calculated that in 1938 the total amount of liquid reserves in the world was just about 100 per cent. of the total amount of world imports. In 1963 the proportion of all the liquid reserves in the world, both individually and collectively held, was only 45 per cent. of the total amount of world imports. If you were going to redress the balance you would need to increase liquid monetary reserves in the world by no less than 77,000 million dollars. In this Bill they are increased by just over 4,000 million dollars, from about 16,000 million in the International Monetary Fund to just over 20,000 million. That is the measure of the insufficiency of what we are doing now.
If we want to encourage economic growth, if we want to avoid a trade depression in the world, we must do vastly more than what is contained in this Bill. I hope the Government will appreciate that. And let me say to them that they have every possible motive for putting their view very strongly indeed at these international conferences. Do not let them be humble about it, because the consequences of not getting more liquidity will be very serious, not only to this country but to the Government in power. I am always inclined to take an optimistic view, but if nothing is done to increase the present amount of liquidity, I think that there is likely to be a world slump next year and the following year which might be equal to that of 1931. In the 149 Election of 1931 the strength of the Labour Party in the House of Commons was reduced to 50 seats. That means a loss of 260 seats in the House of Commons. But if we can prevent the slump from taking place, I think they may easily get away with a loss of only 100 seats—which would mean that everybody, both here and in other countries, would be very much happier all round.