HL Deb 21 July 1970 vol 311 cc870-9

4.55 p.m.

EARL JELLICOE

My Lords, this is a short and simple Bill. Its purpose is to enable the United Kingdom to take up its increased quota in the International Monetary Fund, in accordance with arrangements for increasing the resources of the Fund which were set out in a White Paper published in April (Cmnd. 4353). Some noble Lords may be entirely familiar with the technicalities, and with the significance of quota and quota increases, and some may not be. Therefore I will very briefly explain the background here.

The main objective of the I.M.F. is to promote a free system of world trade and payments, so as to help member countries to achieve economic growth, high levels of employment and improved standards of living—objectives to which we all subscribe. Member countries can draw on the Fund's resources in times of balance-of-payments difficulty. These resources derive from member countries' subscriptions, and under the new arrangements they will be raised to a total of 29 billion dollars. Each member of the Fund has a quota, equal to its subscription, which determines its voting rights, its access to Fund resources and, since last year, its allocations of Special Drawing Rights.

The Articles of Agreement provide for reviews of the quotas every five years. In these reviews, member countries decide what across-the-board increase would be relevant for all members, in view of the growth of trade and payments, and thus the growth in the possible need for help from the Fund. They also consider the totality of an appropriate general increase for all members, and of special increases for those members whose position may have changed markedly since the last review.

So the eventual outcome of this regular five-yearly process reflects a process not only of calculation, given certain economic calculators, but also of negotiation. It was as a result of this process that our own quota was raised by 360 million dollars to 2,800 million dollars, which is still the second largest quota, after that of the United States. That is really the part covered by Clause 1 of the Bill. Our own use of the Fund's resources has, of course, illustrated that the drawings on them can be very large indeed, as we know from recent experience, and the so-called Group of Ten has agreed to stand ready to lend the Fund some 6,000 million dollars to facilitate major drawings by individual countries, under a scheme called the General Arrangements to Borrow—or, in short, GAB.

This brings me to the second clause of the Bill. It is longer in words than the first but of less significance. United Kingdom participation in GAB was authorised by the International Monetary Fund Act 1962, and I am obliged to tell your Lordships that a technical amendment to this Act is necessary. It provides for any sums which we may lend to come from the Consolidated Fund. This outmoded reference to the Consolidated Fund was not picked up in the National Loans Fund Act 1968, but the deficiency—a purely technical one—will be corrected if the present Bill becomes law.

Your Lordships may wish to consider briefly the nature of the payment which we have to make for our increased quota: £37 million of the 360 million dollars will be payable in gold The remaining 75 per cent. is paid to the Fund in sterling, but is immediately lent back to us without interest. The Fund already holds large amounts of sterling, so that there will be no question of its needing to make early calls on us in respect of this new payment. So much for the details of the United Kingdom quota and the Bill itself, which is extremely simple and straightforward.

I should like, in conclusion, to say a few words about the international monetary background—a matter of rather greater general interest—so as to fit these I.M.F. quota increases into their more general monetary context. They are part of a series of important developments in the last year or so affecting world liquidity. Noble Lords are of course only too well aware that much of the past year, 1969, was characterised by great difficulty and great tension in the foreign exchange markets, with severe bouts (with which we became all too familiar) of speculation. But there were forces steadily at work trying to improve the situation, and I think it is fair to claim that by the end of last year, as the result of a very helpful process of international co-operation, there had been a dramatic change for the better. In the first place, of course, the changes in the parities of the French franc and the German deutschmark, together with the great improvement in our own balance of payments, restored confidence in the main parities; and this was a very considerable gain.

Second, of course, at the annual meeting of the I.M.F. Governors in the autumn of 1969 the important decision was taken to activate the Special Drawing Rights scheme—and this, of course, is a development of very great importance. The member countries of the I.M.F. now have it in their power to determine rationally how the world's needs for liquidity are to be met in the period now stretching out ahead of us. I think it is worth remarking here that while total world reserves have grown substantially in the last decade or so, the total in relation to world trade has declined by over 50 per cent. since the early 1950s. This decline was of course masked up to 1960 by the redistribution of dollars away from the United States, but in more recent years growth in liquidity has been seen to be much less rapid. I think that international discussions as to how to meet this rather threatening position have been going on more or less continuously since 1963. They have certainly been protracted, but the outcome, in the S.D.R. scheme, is a good one.

My Lords, the other useful and helpful development was a settlement, towards the end of the year, of the troubled question of sales of South African gold. The two-tier gold system set up in March, 1968, at a time of crisis, insulated gold inside the monetary system from gold transactions in the free market, and it worked quite well. The agreement reached at the end of last year, under which South Africa will normally sell her new gold production in the free market but has recourse to sales to the I.M.F. when the free market price is at or below 35 dollars an ounce, has, however, helped to remove further the potentially dangerous anxieties and frictions caused by the continuing uncertainty over the monetary price of gold; and this, I think it is fair to claim, is also a gain for stability in the international monetary system.

In conclusion I should like to say only two further things. First, I believe that it is fair to claim that as a result of these important, protracted but co-operative efforts the international monetary scene has shown some very desirable improvements in the last year or so. Whether it will remain so encouragingly stable depends, of course, on how the Governments concerned continue to act, and on their continued recognition of the need for co-operation in an increasingly interdependent world. This will need a lot of hard work and hard slogging; but all the recent developments, I think it is fair to say, reflect fruitful co-operation, and I feel that we can be reasonably optimistic, therefore, about the future.

I think it is also worth remembering, when we deal at this five-yearly period with the Fund, that we in this country were influential in setting up the Fund; and indeed the World Bank, the other Bretton Woods institution. They were conceived in the dark days of the war, and many of your Lordships who knew him will be aware of the great part which the late Lord Keynes played in helping to establish this system. They have been the foundation of unprecedented growth in world prosperity since the war, and I think the Fund has deservedly established its position in the world payments system. It is in the light of that, and in the light of the part which the United Kingdom has played and is continuing to play in developing the system, that I commend this Bill to your Lordships. I beg to move that this Bill be now read a second time.

Moved, That the Bill be now read 2a.—(Earl Jellicoe.)

5.5 p.m.

LORD BESWICK

My Lords, as the noble Earl has said, this is a short and simple Bill, but he will also agree that it is a Bill of quite profound implications. It is a Bill we all want, and I appreciate the need to get it through this week. I hope that the noble Earl will not take it as a criticism if I say that it is rather unfortunate that it has been necessary to rush the Bill through this week, and therefore possibly limit, both in this House and elsewhere, a discussion which might have taken place on matters of quite significant importance. Having said that, I also want to say how much I appreciate the careful and courteous way in which the noble Earl introduced the Bill, and to say that we are all grateful to him.

As the noble Earl said, this review of quotas to the I.M.F. is a five-year process, and it seems to be a point of time at which one might stock-take a little as to not only what the Fund is and how it was set up, but what we want it to develop into. I should have liked the noble Earl to go on to say what the Government's thinking was about the I.M.F., and how they would like it to be developed. I should also have liked him to have dealt specifically with the relationship as the Government see it between the problem of international liquidity and the general financing of international trade and the system of fixing exchange rates as between one national currency and another. There seems to be a formidable lot of experts about on this subject, and so far as I can see almost as many different views as there are experts. I personally do not claim to be an expert, but I take an interest in the subject and I am anxious to have as much information from the Government as is possible.

There is one comment I would make—and in this I agree with what the noble Earl has just said. Although there have been many upheavals in this area of international finance, the truth is, surely, that it is very difficult to sustain an argument that world trade has been restricted in the past decade by lack of liquid resources. When one considers the situation which has developed, especially, as I say, in the last decade or so, and if we compare it with the experience which some of us had between the two world wars, we are bound to agree that in this area international co-operation certainly has made progress. I take very firmly the view that the introduction of the Special Drawing Rights and the increasingly rational attitude towards gold are among the most significant of our gains.

It is not, therefore, in the management of international systems that we face the sharpest problems—and this Bill will strengthen that proposition. Where the weakness lies is in the control and management of national currencies. What concerns me as a non-expert is that it is becoming almost unthinkingly fashionable among the experts to suggest that if we have less precision in the rate at which one national currency is exchanged for another all our problems will be solved. There is all this talk about floating rates, crawling pegs and wider bands, as if some device of this kind is going to solve for us the problem of competing with other nations of the world in the sale of goods and services.

My Lords, I certainly should not like to experience again all the trauma associated with a decisive adjustment in the exchange rate of sterling, and it would obviously be of some advantage if we could devise a different method of adjusting the rate of exchange if, in the case of one currency, the economy which backs it has permanently deteriorated in competitive power. But it also seems to me that a country which has some basic inadequacy in its economy is not necessarily going to find it easier to compete if its currency slips by degrees in its exchange value. For a temporary difficulty the answer seems to me to be adequate international liquidity. None of the possibilities of flexible exchange rates is necessarily a better solution.

I am asking the noble Earl to tell us what the Government thinking is about this; what is going to be the Government attitude when this matter comes to be discussed, as I understand it will later this year, and what sort of ideas the Government have on it. Are they going to support the proposals that we should have a more flexible rate of exchange? Have they a formula; do they support one system rather than another? Or do they agree with me that basically the answer is to have sufficient liquidity to tide over temporary difficulties, and that a rate of exchange as stable as possible is the most helpful situation so far as manufacturing industry is concerned? I hope that the noble Earl can say something on this problem of exchange rates and the way it is proposed to manage them. If he could do that, I have no doubt that we shall have no difficulty in giving this Bill a Second Reading.

5.12 p.m.

EARL JELLICOE

My Lords, I am grateful to the noble Lord for his reception of this Bill. I, too, very much regret the fact that, not perhaps the Bill itself but the background to the Bill has not been further discussed this week and last week in both Houses of Parliament, because the I.M.F. and the World Bank, too, are institutions of fundamental importance and I think their affairs deserve more discussion inside and outside Parliament than they sometimes get. I agree with the noble Lord that this is a pity. I would only say that the fact that time has not permitted this is not something which can be entirely laid at the doors of Her Majesty's present Government; that it was at least one of the side effects of the fact that we had a little local Election a month ago.

The noble Lord, Lord Beswick, quite reasonably, asked me for some further indication of our general approach to some of the issues which are being discussed within the I.M.F. forum at the present time. There is something I can say here, but perhaps not altogether sufficient to satisfy the noble Lord's not unnatural curiosity. All I would say is that I agree in general with the line that I think he was taking: the fundamental problem here is to secure that the liquidity resources are sufficient, if only to help offset what could be a very dangerous tendency, the tendency towards greater restrictiveness in world trade—which is something which could very easily come upon the system if it began to freeze up. That is the great danger. That is where liquidity is so important.

He asked whether I could do something to indicate Her Majesty's Government's attitude on this fascinating area of wider bands, floating rates, crawling pegs or any other of the curiously-named pieces of possible mechanism. All that I should like to say is that I feel that the advocates of some of these approaches—and some of them may have merits—at times overstate those merits. There are both costs and advantages in the present system of stable but moveable parities and there are costs and advantages in any alternatives which have been put forward. I doubt whether any particular system is necessarily a cure-all. Nor does it absolve any particular Government from taking the internal measures which are necessary.

Therefore, if we are going to change the system and lend our support to change, I believe that it must be in a way which we can see will bring a net advantage to the system as a whole. That said, I am sure that it is right that the merits of the present system should have been discussed, and at the moment they are subject to close scrutiny in the I.M.F.; because as the noble Lord doubtless knows, their executive board has been examining these proposals for the past years. It is my impression that it is probable that the member countries of the I.M.F. will conclude that major changes in the system, like recourse to freely floating exchange rates or very wide margins around a parity, would be destabilising and therefore unhelpful. That is why discussion at present within the I.M.F. is for the most part centred on the possibility of introducing more limited changes: of introducing margins slightly wider than the present 1 per cent. on either side of parity which is permitted by the Fund rules, of purely temporary floating rates with adequate safeguards and of facilitating possibly smaller and more timely changes in parity than have been usual in the past—a rather narrower band of possibilities.

With the subjects under such close discussion, I do not think it would be right for me at the present time to go into too great detail; nor, indeed, has the time come when Her Majesty's Government must take a final view of these various possibilities—and I have sketched the range of those most under discussion at present—on the proposals now under discussion. But what I do believe is important is that the outcome should be one having the full support and full agreement of all the countries concerned. To that extent the desirable course would be the agreed course. That is essential. In any event, nothing in the I.M.F. debate on flexibility which has been going on has caused us, or other member countries, as far as I know, to believe that the present proposals to increase additional liquidity which are written into this Bill by adding to the Fund's resources are in any way unnecessary or untimely.

I recognise that I have not given the noble Lord all the information he was seeking. I hope that I have given him some indication of the way in which Her Majesty's Government's mind is moving on these matters and the way in which discussion seems to be going in the I.M.F. With that, I hope very much your Lordships will agree to give this important Bill a Second Reading.

LORD WYNNE-JONES

My Lords, before the noble Earl concludes, may I ask whether what he has said means in effect that any negotiations are entered into with the preliminary idea that no change should take place at all? Because I understood from what he was saying that Her Majesty's Government are very sympathetic towards any modification provided that it essentially leaves things as they are. One would have thought that if one was going to have serious discussions one ought to start the discussions with the idea that modifications might well be desirable. Could the noble Earl enlighten us?

EARL JELLICOE

My Lords, I am surprised that the noble Lord should have asked that question, because I was at pains—my powers of exposition were perhaps at fault—to say that the discussions have been wide-ranging but that at present it would seem that most of the member' countries of I.M.F., if they favour change, are going to favour it within a rather narrower margin than some of the schemes which have been mooted up to now. I was not closing my mind or that of the Government to our endorsement of some of these proposals; nor was I saying that no change was either possible or desirable. I thought that I had made my position clear. I hope that I have now made it a little clearer.

On Question, Bill read 2a; Committee negatived.