§ Debate resumed.
§ 3.1 p.m.
§ Lord Kaldor
My Lords, many of us are grateful to the noble Lord, Lord Soames, for having brought forward this Motion. I hope he will forgive me if I make no attempt to follow his arguments in detail. Owing to the shortness of time I should like to confine my remarks to only one aspect of his Motion: namely, the international currency situation. Since the breakdown of the Bretton Woods system, two things have happened. Industrial growth among the Western countries has greatly slowed down or even turned into a decline, and there has been a greatly accelerated inflation, worldwide in scope and accompanied by a very rapid growth in non-resident bank deposits, a great deal of which were held by non-resident subsidiaries of the major banks in the world in the so-called Euro-currency markets.
There were large exchange rate fluctuations, much of it of a disequilibrating character—as, for example, the large rise in the pound relative to all other currencies up to the end of 1981 which meant that British labour costs, in terms of a common currency such as the dollar, rose by 40 to 50 per cent. in relation to our competitors'. The exchange rate movements in turn were largely governed by expectations which were unstable. They were governed by short-term capital movements rather than the requirements of the current account.
Everyone agrees that the present situation is chaotic, and the frequent changes in exchange rate relativities, whether they come about spontaneously or as a result of an agreement such as the EMS agreement last weekend, are not conducive to a recovery of the world economy. In fact, it can be shown that, in order to have an expansion of demand which is truly international in scope, fixed exchanges are needed and not floating rates.
The Bretton Woods agreement was extraordinarily successful in terms of steady growth and full employment in all the major industrial countries. In retrospect, I think that the success of that agreement was mainly due to the fact that from the early 1950s onwards there was a continued outflow of dollars mainly directed to third world countries (both through 1120 loans and through unilateral transfers) which in turn meant that the other industrial countries experienced a steady increase in the demand for their exports, and had on the whole favourable balances of payments, and accumulated reserves.
The system broke down when the currency reserves of the industrialised countries were swamped with dollars and there was a growing disinclination to accept any more. This led to President Nixon's dramatic step on 15th August 1971 of suspending the gold convertibility of the dollar, which had fatal consequences which were quite unexpected—even though the step itself was little more than a formality, since the dollar was only convertible in special circumstances after March 1968.
The fatal consequences were in terms of unleashing inflationary expectations throughout the world, and the consequent large fluctuations and greatly enlarged volatility of commodity prices. Now more or less everyone is agreed that the present situation is extremely unsatisfactory. I do not think I can find anyone who would deny that, or that it must be changed. There are those who wish for a simple return to the Bretton Woods system, and there are those who want a return to the pre-war gold standard; and finally there are those who feel that neither of these courses would bring a real remedy and that what is required is a new international reserve currency based on a commodity standard.
There was a time not so long ago when monetary experts appeared to be agreed that a mere limitation in the supply of inconvertible paper money would secure the same stability of prices as a currency which is directly convertible into one or more commodities at fixed rates. I think that this belief has by now been exploded, partly because it has been shown that no one country can control its own money supply in the face of inflationary trends and also because still less is it possible to limit the growth of the world money supply of which the Euro-currencies, which are not subject to any controlling authority, form an ever growing part.
My own solution would be very much the same as that of Lord Keynes, who worked out in the course of the war two plans which he himself regarded as closely related, and he considered the realisation of each to be a precondition to the success of the other. The first plan was for an international clearing union which, in greatly emasculated form, came into existence in the shape of the International Monetary Fund. The second was entirely stillborn, and the true extent of Keynes' involvement in the second plan has only become known recently with the release of secret documents under the 30-year rule and the publication of Keynes' Collected Writings.
The second organisation which Keynes advocated he called International Commodity Control. It argued in favour of the establishment of buffer stocks for each of the major commodities moving in international trade and financed by the issue of "bancor"—which was the name he gave to the new international currency, and which I suppose was conceived as something similar to what we now call SDRs. He envisaged "bancor" as an international reserve currency to be created by this new clearing union.
1121 Keynes thought that the establishment of such buffer stocks would have enormous advantages for stabilising prices generally, since stable food and raw material prices are a precondition for the stability of the prices of all other goods and services. He also thought that in this way the growth in production of industrial materials and foodstuffs would be greatly stepped up (because with stable prices the producers' risks would be so much smaller) which in turn would make it possible to accelerate very considerably the industrialisation of the underdeveloped parts of the world.
Keynes' proposal met with a great deal of opposition from some unexpected quarters, chiefly the Bank of England, which felt at the time that Keynes' proposals were,far too laissez faire inasmuch as they still allow a place for private trading",whereas the Bank of England were then convinced (no doubt it was a temporary aberration under the stress of the war) that:Nothing but output restrictions, enforced by export and import quotas, could solve the problem of commodity surpluses".They failed to take into account the fact that because, on a worldwide scale, idle manpower exists in super-abundance—whereas capital accumulation is a consequence of the growth of production as much as a cause of it—it is the rate of growth in the availabilities of primary products which, over longer periods, governs the rate of economic growth of world economy.
§ 4.11 p.m.
§ Lord Roberthall
My Lords, the House will be grateful to the noble Lord, Lord Soames, for giving us the opportunity to debate this important subject. He has spoken about it a number of times in your Lordships' House and we on the Alliance Benches agree with almost everything he said today. We wish him well and we hope that he will continue to say it, although I am afraid that so far he has not received much change from his noble friends, or at any rate from his Front Bench.
In the debate a fortnight ago my noble Leader, Lord Diamond, summed up the criticism of the internal policy of he Government when he said they were turning their back on the whole experience—he meant particularly experience of demand management—of the post-war period. Time did not allow him to go into the international situation, but I shall comment on what I believe strongly in that context, which is that exactly the same can be said about the international economic policy of Her Majesty's Government.
The noble Lord, Lord Cockfield, is fond of telling us that world recessions are inevitable—that we always have booms and slumps—and that the present one cannot be attributed to Government policy. When, many years ago, he and I were colleagues on the Budget Committee, he displayed the most extraordinary memory; nobody could ask him anything to which he did not know the answer. Listening to him in your Lordships' House now, I feel that that ability is still there, though he appears to have a mental blockage on this subject because he seems entirely to have forgotten that since the last recession there have been no world recessions of any substance.
1122 Taking the trough of the great depression and the trough of the present one—which was in, say, 1982—that was a span of 50 years. Taking off, say, 10 years for the war, there were 40 years with no world recessions worth mentioning. That happened not just by accident. The genesis of it was that at the end of the world war the statesmen had all lived through the great recession and were determined that the world should not again be subjected to the misery, waste and suffering that that had entailed. They all found it hard to defend the spectacle of want and misery on the one hand, and labour and capital rotting away on the other, with no way of bringing them together.
After the war they adopted the objectives of stable exchanges, fewer barriers to trade and the seeking by all Governments of high and stable levels of employment. To that end they set up the institutions which were to co-ordinate and supervise the work of the different Governments; for example, the IMF for exchanges and the GATT for trade. Originally the Economic and Social Council was supposed to supervise the employment pledges, but it became clear that such matters could not be discussed with the Russians. By a great stroke of luck, the Marshall Plan led to the OEEC, which in turn led to the OECD, and that for many years provided the forum in which countries could discuss their general economic situations, including the problems of employment and unemployment, and they could work towards co-ordinated action.
That went on until a few years ago. The last effort of that kind was in 1977 or 1978 when there were discussions which led to the main Governments of the industrialised countries agreeing on a co-ordinated programme of expansion. Since then, it has all gone by the board. The reason was that inflation had reached heights which were frightening and it was felt that something had to be done. In 1979, when the present Government came to power, I said that although for many years I had advocated an incomes policy, it had not been successful and I thought the Government should be given a chance to try the monetarist policy which they have since adopted.
Since then we have seen a tremendous waste of resources—again, on the scale of the 1932 recession—with serious damage being done to the organisations which did so well and produced that long period of world prosperity between the end of the war and a few years ago. The price that has had to be paid for counter-inflation by strictly monetary methods, with the use of unemployment as the instrument of policy, has been very great indeed, and I have come to the view—it is the view of the Alliance—that we should be able to do better.
The noble Lord, Lord Soames, was optimistic—at least, he made a show of optimism—about the prospects for the next summit meeting at Williamsburg. I do not know if he has studied the Chancellor's Budget speech; his right honourable and learned friend was, I thought, forthright about Government economic policy and took pride in the fact that at the Versailles summit last year it was reaffirmed that the control of inflation had to be the top priority. As I understood it, he was looking forward to the same again—to reaffirming that proposition at Williamsburg—and he said that 1123 nothing could be more dangerous than for countries having had some success in their struggle, to relax in order to ease the position of others less successful; in other words, everybody must take their medicine.
That overlooked the fact that concerted concentration on deflationary measures inevitably produce a vicious downward spiral, a situation in which nobody can win: you produce unemployment, pressure on costs attempts to do what was so much complained of in the 1930s, you export your unemployment to somebody else, they are driven to do the same back and you get what we see now, competitive devaluation and the gradual erosion of the free trade system which made such progress, and we now see all sorts of gnawing away at free trade. Nowadays it is almost obscene to talk about "full" employment. The objective of maintaining concerted high levels of employment has gone completely.
Though we in the Alliance recognise that the control of inflation is very important, we feel strongly that other matters, too, ought to be taken into account. Here, I believe that the plea which the noble Lord, Lord Soames, made—that we should try to revivify and get moving the international institutions—holds the key to what is done. In these circumstances, we cannot get very far by ourselves. I believe that we could stand a certain amount of reflation, and I fully agree with the Alliance programme on that; but if everybody else is pulling you down, you cannot get very far yourself.
Time will not permit me to expand on that point, but I consider that the IMF should be given a lead by the major countries to see whether there cannot be a little more stability in exchanges. The main condition that has changed since Bretton Woods is that rates of inflation are different in different countries. That means that the importance which was attached to rigid exchange rates—there was a terrific uproar if it was necessary to change; I remember in 1949 that we set the world by the ears with our first devaluation—should become less in the system. The major countries should give a firm commitment to stick to the GATT and not to go in for the protection that is now taking place. There should be a concerted attempt to get the world turned round, to get it at least to move in the right direction.
§ Lord Cobbold
My Lords, I should like to add my voice to that of the noble Lord, Lord Soames, when he stresses that a more stable régime of currencies could be a great help in promoting better worldwide economic conditions. I have little to add to what I said in the debate on this subject a few months ago. I then stressed that today's difficulties in this field are much greater than were those in the 1950s, and earlier. This is largely due to the enormous increase in the amount of volatile funds moving around the world looking for better interest rates and prospects of exchange profits.
In the earlier period there were of course times of crisis when situations of evident over-valuation, or under-valuation, had to be dealt with. But there was not the continuous day-to-day up and down movement which nowadays adds so much to the difficulties of international business. Generally 1124 speaking, in those earlier days the major central banks had adequate funds to keep a reasonable measure of day-to-day stability; and there were agreements such as the Tripartite Agreement in the 1930s, culminating of course in Bretton Woods, with the International Monetary Fund and the World Bank.
Obviously conditions have changed; in particular, as I have said, with the dramatic increase of volatile funds and developments such as the Euro-dollar market. Clearly, to return to Bretton Woods as such is not feasible. But I feel that some lessons could be learnt from Bretton Woods, and that there is an urgent need of some international structure, perhaps based on the International Monetary Fund, and worked up together by the Governments and central banks responsible for the major currencies of the world. To provide more stability in exchange rates, in particular on day-to-day movements, is surely a matter which should be given very high priority indeed in discussions on worldwide economic and financial policy.
§ 4.24 p.m.
§ Viscount Eccles
My Lords, once again my noble friend Lord Soames has called our attention to the world economy and I am looking forward to the remarks of the noble Lord, Lord Lever of Manchester—always pungent and always interesting. I want to say only a word or two about the debts which Latin America owes to the international banks. Those who know well that fascinating part of the world always warn us not to lump together the 20-odd countries in Latin America. They differ widely. They differ in their social mix, in their natural resources and in their forms of Government. However, extraordinary to say, during the last few years international finance has largely submerged those differences and made possible a single pattern of financial crisis.
Whether these economies produce oil, as do Mexico and Venezuela, or whether like Brazil they do not, their Governments, be they dictatorships or democracies, have overspent their revenues and are hugely in debt at home and abroad. Overspending is a disease as catching as the common cold. It has been encouraged by the facility with which developing countries could borrow. The banks, flush with OPEC money, were eager to lend. Nevertheless, looking around Latin America, from where I have just returned, one sees that the main responsibility for the crisis rests with the borrowing Governments and their agencies—which are the equivalent of our quangos—which have also borrowed very heavily abroad, often without telling their central banks what they were doing.
As other noble Lords have said, no doubt the world monetary and banking system could be much improved, and I should like to see a more stable system of currencies. But the monetary system is not at the root of the third world's troubles. The responsibility rests squarely with the Governments and their agencies who have so little to show for all that they have borrowed—except, of course, the accumulation of armaments. To please the military in those countries vast sums have been borrowed and are still being sought to buy arms. Those who sell these arms—in Latin America one notices France and Israel 1125 in the forefront of this business—make enormous profits and give enormous commissions. All the time the great bulk of the population, increasing rapidly in numbers, remains in poverty and is edged towards that kind of envy or even despair which is fertile soil for Communism. This situation in Latin America is one which the Western world cannot afford to neglect.
Now that most Latin American countries are trying to reschedule their debts—and I hope that they will all succeed—would it not be in their own interests for the creditors to make a condition that the further purchases of arms should be postponed and replaced by goods which would enable the respective economies to become more productive?
In Mexico and Venezuela, for example, the export of goods other than oil has been allowed to fall to a ludicrously low proportion of the total required to pay for their imports. In our own country we have seen what it means to a town or district dependent on a single product—it might be coal, it might be steel—if the demand for that product disappears: unemployment then flattens the whole community. Such disasters are threatening the oil producing countries which have relied so blindly on OPEC to maintain the price of oil far above the cost of production per barrel. If you take a country like Brazil—where coffee more or less replaces oil—there you see that the same overspent and over-borrowed situation has been allowed to develop.
It would be a mistake if Western leaders at Williamsburg were content to cover up the follies of these Governments. We are all partly responsible, borrowers and lenders alike. But the lesson primarily has to be learned by the Governments which have overspent and over-borrowed. Their creditors should give them examples of sound finance at home and, if they did, they might be able then to persuade the Latin Americans to devote any new money to the production of non-oil goods for home consumption and export.
I shall be told that that is the role of the IMF; and indeed it is. But, when you look at the recession in a sub-continent like Latin America, you see that a lead is required above and beyond the bankers and the money men. Your Lordships may think that such a reversal of policies is impossible in the political circumstances of Latin America. My recent visit makes me cautiously optimistic. The press and the media are remarkably free, frank, brave and well-informed on the root of the trouble; that is, the overspending of their Governments. In Venezuela, for example, the leading businessmen, academics and commentators are unanimous in giving the right advice. They are looking for help from outside to persuade their Government to balance the budget. Perhaps I might say that in many Latin American countries the most talented and best educated people do not go into politics. There are many first-class men and women who are as much against military dictatorships as they are against Communism. They need somehow to be persuaded to take a hand in governing their country.
Therefore, I am against covering up the root cause of the crisis. I am against rescheduling these debts in the back parlours of banks with the minimum possible 1126 publicity. We should come out into the open and admit the mistakes, which are ours as well as theirs, propose sound policies and go forward together to a world recovery. President Reagan, Chancellor Kohl and our Prime Minister could take the lead at Williamsburg and set the recovery in motion. Let them make what improvements they can in the monetary system. It is not the root of the trouble. Let the main emphasis be put where it belongs on the better management of revenues and expenditures by Governments everywhere in the world.
§ 4.34 p.m.
My Lords, I am sure that the noble Lord, Lord Soames, deserves our threefold congratulations; first, for choosing a subject which has become remarkably topical in the last few days in view of the events in Brussels; secondly, for the power and lucidity of his speech; but thirdly, I think, for providing the occasion for what we can confidently expect to be an equally valuable speech by my noble friend Lord Lever. When the noble Lord, Lord Soames, wondered whether the Labour Party is likely to adopt the common sense of my noble friend, I wonder equally whether the Government are likely to adopt the common sense of the noble Lord, Lord Soames. We hope so; and no doubt we shall see later in the debate.
This debate, as a whole, is concentrating our minds on some of the most important issues of the day. They are the issues which have been analysed and highlighted over the past three years by the Brandt Commission and, indeed, by the persistent efforts of the distinguished individual members of the Brandt Commission, not least in this country by the efforts of Mr. Edward Heath. They have been urging over those three years exactly what the Motion of the noble Lord, Lord Soames, calls for; that is to say, a more active and vigorous world economy. The Brandt Commissioners have described, with clarity and vigour, the main elements of the current worldwide depression; mass unemployment and severe contraction both of production and of international trade, all of which is leading to the threat of the collapse of international financial institutions and also to serious political tensions in all parts of the world, with the consequential ruinous arms race and its threat to peace.
In facing these problems, the Brandt Commission has stressed one aspect which seems to me both central and crucial. It is an aspect which was mentioned by the noble Lord, Lord Soames, but I think that it perhaps deserves some emphasis. I have in mind mutuality of interests and the commonality of problems shared by the developed and the developing world. It is no longer possible, as, perhaps, it was as short a period ago as 10 years, to speak of the problems of the third world as something distinct and separate from those of the affluent nations. The message of Brandt, and, indeed, the title of its second report, is that the crisis is a common crisis. I echo the words of the noble Lord, Lord Soames, that because we are all in this together the solution of the crisis depends upon co-ordinated action on a truly international scale.
The essence of the solution to the crisis is that we must change direction. The noble Viscount, Lord Eccles, was urging the governments of the South 1127 American continent to change direction. I hope that he would agree with me that governments on other continents also need to change direction. What we have had, and what to a large extent has caused our problems, has been an excessive reliance on monetarism, excessively high interest rates, increasing protectionism and competitive devaluations of exchange rates. All these things not ony exacerbate the economic situation of developed nations but, at the same time, create even worse troubles for the third world; because world depression leads to low demand and low prices for the commodities which third-world countries seek to sell. They therefore have to borrow.
I agree with the noble Viscount, Lord Eccles, that sometimes the money that they borrow is ill-spent; but, basically, they are in a position of having to borrow, and then high interest rates increase the repayment burden of the money which they have been forced to borrow. Then, reductions in aid (which we have unfortunately seen) retard the economic growth of the developing countries. Not only does this perpetuate the poverty in the third world; it has a backlash effect on rich countries. Defaults on loan repayments from the third world may lead to a knock-on effect, to the collapse of our own banks; and the loss of markets in underdeveloped countries can well cause our own factories to close.
In my view, the financial proposals of the second Brandt Commission Report are the only way in which the world can check this process of mutual economic destruction. Those proposals are set out in the document—Common Crisis—on pages 13, 14 and 15, and I shall not itemise them. But, above all, what they propose is a considerable increase in the lending capacity of the IMF and the World Bank through its International Development Association. Of course, the commission makes many other proposals in the fields of trade, food and energy, but it is the financial proposals which are particularly vital, it seems to me, and which are relevant to today's debate.
Let me conclude with a warning about the grave danger of self-deception and self-justification by governments of the policies they are pursuing. Eighteen months ago, at Cancun, we had a conference which had much publicity, many set-piece speeches, but unfortunately very few results. We now face the danger that the Government will pretend to be doing better in these matters than is justified by the record. They have gone on record as welcoming the Brandt Commission report. Indeed, I noticed that Mr. Rifkind of the Foreign Office, in another place, was listing those recommendations of the Brandt report, which the Government have already accepted. No doubt it was an admirable list.
But when I read those words my mind went back to a quotation, which had struck me forcefully, on page 3 of Willy Brandt's introduction to his second report. He was referring to the words of Harry Dexter White, whom he described as the American counterpart of Lord Keynes, at Bretton Woods. These were Harry Dexter White's words which Willy Brandt quoted:Where modern diplomacy calls for swift and bold action, we engage in long drawn-out cautious negotiation; where we should talk in terms of billions of dollars, we think in terms of millions; … 1128 where we should be dealing with all -embracing economic, political and social probems, we discuss minor trade objectives, or small national advantages;".Maybe that is what we were doing at Brussels at the week-end. Those words of Harry Dexter White of some 40 years ago are, I suggest, as apt today as they were on that occasion.
The noble Lord, Lord Soames, referred several times to the importance of the forthcoming Williamsburg economic conference which is due in a few months. It will not be a new Bretton Woods—I wish it were capable of being that. But even at Williamsburg it would be heartening to think that some world statesman would emerge able to speak and to act as big as the world's critical situation demands. I hope that that will emerge. My hopes are not very strong, but I do commend once more the noble Lord, Lord Soames, for having brought before your Lordships a real opportunity for us at least to face the reality of the world situation.
§ 4.44 p.m.
§ Lord Ezra
My Lords, I should like to join with those who have paid tribute to the noble Lord, Lord Soames, for so eloquently introducing this most important Motion. As has just been said, he drew particular attention, echoed by other noble Lords who have spoken, to the importance of the forthcoming Williamsburg conference. There seems to be no doubt about that sentiment in the House.
However, I must say that I was disturbed to read in this morning's press—I am quoting from the Financial Times—that in the communiqué issued by the European Council Meeting in Brussels the other day:among the decisions of the council was an instruction to the Commission to prepare positions for the Williamsburg economic conference which will permit the Community to make a substantial contribution to efforts to ensure the recovery of the international economy".That is fine, but this conference is to take place in Williamsburg in two months' time. If it is only now that the member countries of the European Community have instructed the Commission to prepare positions, when are the member countries themselves to consider those positions? I also note in the communiqué that the next time the European Council will be meeting will be in the month of June—that is, after the Williamsburg conference. I think that we are entitled to ask the noble Lord, Lord Cockfield, when he speaks later in this debate, how seriously the preparations for this conference are being conducted and what steps will be taken, not only in individual Community countries but in the Community countries together, to formulate some positive proposals which can be brought forward to make this conference, to which everyone attaches such importance, a success.
It is quite clear that this conference, the summit at Williamsburg, should be concerning itself with two basic issues; the first being how we can stimulate and sustain as widespread a degree of growth throughout the world as possible, without running into all the difficulties of inflation from which we have just emerged. The second is how instruments and conditions within which such growth can most effectively develop can be created.
1129 On the first point, it seems to me—again I am echoing the words of other noble Lords—have mentioned—that the best contribution the developed countries can make to the resumption of growth is to ensure that there is a degree of practical sustained growth in their own countries, because by so doing not only will they stimulate the economic activity in their own countries but their participation in world trade will be substantially increased. It is the diminution in the level of world trade, particularly as it bears on the commodities produced by the third world, which has created part of the crisis through which we are going internationally.
The noble Lord, Lord Soames, spoke about interdependence between countries, and that is perfectly true. But I believe there is another aspect of interdependence when one considers the resumption of growth: that is, interdependence between public and private investment. I am very concerned about the way in which public investment has diminished in this country below the levels set for it in Government objectives. There is a very close interdependence between public and private investment. Public investment sparks off an enormous amount of private investment in the construction and engineering sectors. The time to be getting our infrastructure right is now, when the resources are available, and not waiting for the time when, in further moves towards growth, those resources are required and inevitably used for other purposes.
I think that as part of our contribution to Williamsburg we should be preparing the ways in which we can tell the other countries how we are trying to stimulate effectively further growth in our own country. When it comes to the conditions under which this growth can proceed, then it is quite clear that there are three basic issues. There is the risk of a return to protectionism; there is the instability of the currencies and there is the problem of indebtedness. One hopes that at Williamsburg these three problems will be very seriously considered.
Many noble Lords have referred to the achievements that arose from the institutions and agreements which were set up in the aftermath of the Second World War. Those institutions and that foresight which led to those agreements meant that we all benefited from something like two decades of sustained and continued growth. And even though conditions today may be different, at least it should be fair to ask whether we should try to learn a little more from what was achieved then, rather than simply say that what was done in those days is no longer valid. Indeed, certain suggestions were made as to ways in which the experience of that halcyon period could be applied to trying to find ways in which the far more violent fluctuations of currency could be diminished; ways in which we could restore the attitude towards trade and diminish the need for protectionism. Of course, protectionism itself can be bred from weaknesses in the economy, so if we correct those weaknesses the pressure towards protectionism diminishes.
Then we have the problem of indebtedness, and there are divided views on this subject. There is the concern, on the one hand, that if the assistance 1130 provided for these countries is too easy, they will never have the incentive to get their own economies in order. On the other hand,there is the view that they face a very special crisis and need to be helped over it. I am quite sure that the answer lies between those two views. So here is a very firm and definite agenda for the Williamsburg conference. I hope very much that there will be serious preparation for it between the participants and those various countries whom they represent.
§ 4.52 p.m.
§ Lord Taylor of Gryfe
My Lords, at the time of the last debate, which was on 15th December, the international banking crisis was at its height. Since then there has been the rescheduling of the debts of Mexico and Brazil; Poland's position has been temporarily relieved; there are hopeful signs of increased IMF quotas and the BIS has relieved the pressure by bridging loans. The proposed clearing house for information on the viability of borrowers in Washington has now been established, and even the new Governor of the Bank of England has said, with more optimism than appears justified, thatwe have overcome the crisis—if there ever was one".I do not believe that the crisis has simply vanished, although I applaud all the steps that have been taken by the international banking community to deal with these matters.
There remain three inter-related problems: first, the third world debts, which are still standing at 600 billion dollars; secondly, the continued contraction of world trade and, thirdly, the instability which arises from the fluctuation of exchange rates. These three problems belong together and I am not certain that, at the moment, we have either developed the will or created the strength in our international institutions to solve them. As each individual nation fights for its own advantage, as has been said by the noble Lord, Lord Soames, whether in steel or in agriculture, we neglect the most important fact in the world today: that we are all bound together in an international trading network and we are dependent on one another.
First, let me say a word about the LDCs' debt of 600 billion dollars. They have been caught in an impossible squeeze with the falling prices of primary products. Last year they fell on average by 14 per cent., whereas their borrowings have been related to the London inter-bank rate and their debt service ratio has gone up from 15 per cent. in 1977 to 30 per cent. last year. While the fall in the price of oil will help a little, except in the case of Nigeria, and a moderate growth in the economies of the Western world will generate some demand for raw materials, I believe that the problem of the LDC debts is a crucial one. While the present situation exists, the commercial banks will be reluctant to take on their books any further borrowings, particularly medium-term or long-term borrowings on which the LDCs depend for reconstruction. Seventy per cent. of the total debts of 600 billion dollars, to which I have referred, are on the books of the commercial banks.
I have been interested to read recently a number of papers which have been considered in the financial community, with regard to relieving the LDCs of some of that debt—at least temporarily. My colleague at 1131 Morgan Grenfell, Mr. Bill Mackworth-Young, has suggested that the burden of problem bank assets should be moved from the commercial banking system to the international capital markets. This will be done by a new agency supported by the IMF. Or the central banks should purchase these loans at face value and issue, in exchange, non-interest bearing bonds. These could be discounted at central banks, if serious liquidity problems arose. In addition, these central bank-backed bonds could be converted into a second type of paper, which would carry a low interest coupon and would be tradeable on the secondary markets.
Another less complicated scheme has been proposed by the general manager of Barclays Bank International, which would be for the central banks to purchase part of these loans at discount, as a temporary relief measure. In turn, the banks must agree to lend the equivalent amount of new money—perhaps, as export credits—but, at least, to lend it on to third world countries. This would set in motion again the lending process, which has dried up. If the discounted loan was not honoured ultimately, it would revert to the lending bank so that the lending bank would not be totally relieved of its responsibility.
Another scheme that is suggested, and which has some attractions, is that there might be an insurance premium paid by the banks to some central authority to cover these debts. This would have the attraction for the commercial banks that they would be able to charge the insurance premium against current costs and tax liability, whereas, so far, the Inland Revenue has not yet agreed to accept the writing-down of debts as a permissible item. Some of these schemes ought to be examined very seriously.
I am not trying in any way to justify some of the lending which took place in the 'seventies, when LDCs were borowing at the rate of 20 per cent. per annum whereas their economic growth was at the rate of 4½ or 5 per cent. per annum. They were in an impossible position. It was irresponsible borrowing. Some of these countries—for example, Mexico—borrowed in order to develop their petroleum resources, when equity participation by some outside investors might have given a long-term stability of capital which is necessary to develop long-term projects. All I am suggesting is that these schemes and these devices might provide some immediate help for the LDCs, and make a positive contribution to the second problem, which is the revival of world trade.
In this connection, I hope that many noble Lords read the 10-page survey of the situation, written by Helmut Schmidt in the Economist of 26th February. What a pity there is no House of Lords in Germany, so that Helmut Schmidt could continue to play an active role in European affairs. I hope that there will be a forum for that man. And what a pity that the British Labour Party, which flirts with protectionism, import controls, further devaluation and withdrawal from Europe—a commitment that was emphasised on the radio this morning by its official spokesman—does not listen to the wisdom of that great social democrat, Helmut Schmidt. He calls for a stable exchange rate. He says that:The quality of an international monetary system can be measured by the criteria of reliable calculable exchange rates, free 1132 capital flows, stable prices and steady growth in world trade and production. Judged by these criteria, the general unregulated floating since March 1973 has not done well.".Helmut Schmidt goes on to describe protectionism as "an escape into suicide". He sees the attractions of nations developing protectionist policies. Regions like to protect themselves; it is popular to stick up for yourself, and so on. But it bears no relation to the reality of the world in which we live. Our health and welfare are dependent upon prosperity.
While we are perhaps breathing just a little easier, I believe we should heed the warnings of Helmut Schmidt. I am not sure whether we need new, elaborate international institutions. The experience of the past few months has shown that Governments, central banks and commercial banks can work together. We must keep up the momentum. We must be alert to immediate dangers and be ready with machinery for quick response in the event of any further deterioration of the situation. This involves strengthening the will and the power of existing international organisations like the International Monetary Fund and the International Development Authority.
The suggestion of the Group of Thirty that the IMF should supplement its resources by tapping private markets should certainly be pursued. This might be a device whereby the IMF could increase its power. Let me suggest an agenda for Williamsburg. First, moderating the wide variation between expansion and contraction in the offshore markets for currencies, loans and securities; second, minimising disruptive fluctuations in international capital movements among leading countries; and thirdly, focusing these efforts on limiting erratic or sustained distortions in exchange rates among key currencies, while using co-ordinated central bank intervention in the foreign exchange markets to check disorderly conditions.
§ 5.2 p.m.
§ Lord Boothby
My Lords, I rise to speak for only one reason. I was talking last week to a group of noble Lords who were kind enough to say that my worst enemy could never accuse me of being a bore. Then, after a moment's pause, one of them said, "Except on one subject". To my dismay they then agreed unanimously that on the subject of monetary policy I was a crashing bore. I had only one defender, my noble friend Lord Shinwell. All the rest said, "No, it is no good. Whenever you get up to speak about monetary policy or gold, we all go back to sleep". I will tell your Lordships why. Nobody knows it better than the noble Lord, Lord Lever of Manchester. I have been talking in Parliament continously on this subject for 60 years. He, poor devil!, has heard a great many of those speeches in both Houses of Parliament—
§ Lord Boothby
—and he agreed with many of them. Unfortunately, the Treasury and the Bank of England did not agree with any of them. But the fact remains that over all those years I was steadily right, and the Treasury and the Bank of England were as steadily 1133 wrong. I have now decided that if I go on talking here about the subject I shall only repeat myself. Therefore I had better shut up. However, the Motion of the noble Lord, Lord Soames, has given me the opportunity, which I relish, of boring your Lordships on it for the last time. I am looking forward to it very much. I can promise your Lordships only one thing: that it will be a brief period of boredom, with only a few yawns, because there are only three topics I want to touch on; and they will not take more than a few minutes.
The first point to which I must draw your Lordships' attention is the Genoa Conference of 1922. It deserves the closest study, There had been nothing comparable to it since the Congress of Vienna. As Count Kessler wrote at the time, it was an oecumenical council, comparable to those which the mediaeval church used to summon for the salvation of Christendom; and, as in the Middle Ages, a terror overhung the gathering that failure might portend catastrophe to European civilisation. My Lords, it did.
The Genoa Conference was dominated by two most remarkable men—Mr. Lloyd George and Rathenau, the German Foreign Minister. Rathenau has some claim to be regarded as the greatest industrialist-financier that this century has produced. We know something about Lloyd George. He was a genius, the only real political genius of his time. He was then at the zenith of his powers. He talked to me as a boy and told me of his ambitions. They included revision of the Treaty of Versailles and the abolition of reparations and the inter-allied debts. But Lloyd George was too much for the very pedestrian British politicians who then represented the very pedestrian British people of that time. They took the view—and said—that Lloyd George was a dynamic force, and therefore dangerous; so they threw him out. The Germans went one better. They assassinated Rathenau. All this happened within weeks of the Genoa Conference, which thereupon crashed, together with all its resolutions.
Among those resolutions was the currency resolution drafted by Sir Basil Blackett and Sir Ralph Hawtrey, both now dead. Thanks to Sir Ralph Hawtrey, I have in my possession the original draft of the currency resolutions. It was described by Sir Laming Worthington-Evans, who was at the conference, as "a financial Code, worthy to rank with the legal Code of Justinian". Briefly, the Genoa currency resolutions recommended a gold exchange standard, with the price of gold fixed from time to time, with a view to increasing production and trade all over the world; and with exchange rates devised to fluctuate as little as possible, but not altogether inflexible. There is a mass of other fascinating material in the Genoa Resolution, a copy of which I suppose must reside in some musty corner of the Treasury. When I was Parliamentary Private Secretary to the Chancellor of the Exchequer, they put Sir Ralph Hawtrey in a room at the top of the Treasury and locked the door. They treated him almost as though he were a lunatic. So all that ended and foundered. A great chance of permanent world recovery was missed, and missed for ever.
In what I must say was an unusually foolish reply to a question of mine last week, the noble Lord, Lord Trefgarne, said how silly it was to go back 40 years to 1134 see what happened then when one was framing policies for today. How wrong the noble Lord was. I remember Winston Churchill, whose experience was somewhat greater than that of the noble Lord, Lord Trefgarne, saying to me that the purpose of examining the past, and even recriminating about it, is to ensure better action in the present. Churchill went on to say that the first thing he did as Chancellor of the Exchequer was to put us back on the gold standard at the pre-war parity of exchange, which we could not possibly sustain without the most violent deflation. This continued for about 10 years and resulted in tremendous unemployment and much misery in the coalfields and in all the industrial areas of this country. That was entirely a Treasury and a Bank of England decision.
When I said to Grigg, who was my boss at the Treasury when I was the Private Parliamentary Secretary to Winston Churchill, what a mistake this was, and how I knew that Churchill did not in his heart like doing this, Grigg replied that there was only one man ever who made the Treasury do what it did not want to do and that was Lloyd George; and that there would never be another ever; and, of course, it has turned out exactly that way.
I opposed in another place the return to the gold standard at the pre-war parity of exchange. Then, I could find only the support of Sir Frederic Wise, Sir Frank Nelson, Sir Robert Horne, Sir Alfred Mond (as he then was), Lord Beaverbrook, and, in the City of London, Mr. McKenna, chairman of the Midland Bank—who said that it would be hell but did not do a thing. The only senior figure who did anything, and who resigned from the Bank of England, was a Mr. Vincent Vickers. So the Treasury and the Bank of England had it all their own way, and they had it all their own way for years and years. Long after he left the Exchequer, Winston Churchill wrote me a letter in which he said,I have now come around to your view that gold was being used as a vile trap to destroy us",which was fairly strong language for the Chancellor of the Exchequer who took us back to the gold standard.
Then there came a flash of hope. President Roosevelt raised the price of gold. That was followed by the Marshall Plan. The Marshall Plan saved Europe from economic collapse at a very difficult moment. How did the Americans, do it? How did they finance it? They financed it out of gold bullion at Fort Knox, which was then standing at a very reasonable price. That is how it was financed. It cost nobody anything. It was financed out of liquid reserves, which the world so tragically lacks today. We have no such reserves. Why? Because we were taken back to despair, not by the British Treasury and the Bank of England, but by the Federal Reserve Board and the US Treasury, who appeared to me—and have always appeared to me—to dominate American politics and to act entirely on their own. No doubt they brought down President Carter, and now they look likely to bring down President Reagan. Why? Because they have steadily reduced the value of their gold reserves until they finally demonetised gold altogether and the dollar—and with it, every currency in the world. There is no currency today that is intrinsically worth anything except the paper that it is printed on. Until 1135 you correct that situation somehow, you will never get sustained recovery in international trade; of that I am certain.
We suffer now more from the lack of liquid resources than aything else. That is why we find difficulty even in coming to the assistance of the starving people of Ethiopia. We simply do not have the liquid reserves. We did have them; we had them in Fort Knox, with gold at a reasonable price. I believe—and I think I have the support of the noble Lord, Lord Soames, and of the noble Viscount, Lord Eccles, in this—that there should be another Genoa Conference; not just a technical IMF Conference but a general international conference. They have the instruments in the IMF and in the central banks, who do not collaborate as they should at present, but who could, under the auspices of the IMF, be made to collaborate.
Unless we are to have a viable international monetary system, and until we do, there will not be sustained economic recovery in this country or anywhere else. The time has come, as Mr. Gordon Tether said in an admirable article, in The Times, to stop treating gold as a relic, and enable it once again to play a valuable part in the urgently needed reconstruction of the international monetary edifice. The world believes in gold and in nothing else—so that is what I plead for and pray for. And this is the last chance.
§ 5.19 p.m.
§ Lord Kennet
My Lords, the noble Lord, Lord Soames, has been repeatedly and rightly thanked for choosing this Motion at exactly the right time, with reference to the timing of the Williamsburg Conference. I should like specifically to endorse his idea about how to construct the agenda for that conference; the idea of having papers saying what each member of the conference wants the other members to do seems to me to be an ingenious idea, which I hope will turn out to be productive if it is used.
I shall talk entirely about the IMF, with full provisos about my overwhelming ignorance of the matter. As I go along, I ask your Lordships to reflect upon the extent to which the commercial banks are influenced by—I will not say tied to—the kind of policy and decisions which come out of the IMF through the central banks of the member countries. We can only note with interest and perhaps alarm the increasing unwillingness of the commercial banks to do what the central banks think they ought to do in the matter of loans to relieve third world debt.
We have a whole lot of new phenomena that we have not yet caught up with. One of them in this country is Treasury guarantees, of, for instance, the South Africa standby. This, we have ascertained in this House, is something unknown until recently, that IMF loans and standby should be specifically and individually guaranteed by the people of the individual countries through their Treasuries. We have also the political facts, and I shall talk a lot about politics. Within the last year or two it has just so turned out that Kenya and Tanzania have been refused IMF loans, and South Africa and El Salvador have been accorded IMF loans. We have to form a realistic impression of 1136 the politics which do prevail in the IMF. These loans have, of course, produced set-piece debates in the Parliaments of many countries and round the table of the IMF itself.
I want to talk specially about the three big countries in South America, leaving aside Mexico for the moment: Brazil, Chile and Argentina. Our old friend Argentina is perhaps the most instructive country for the whole political aspect of IMF operations. They have been bailed out. In recent weeks and months the Argentinians' own inquiry into the Falkland War—their Franks Inquiry, as it were—have described the people in the former military Government, the Government officials who handled the IMF loan and who handled credits in general, as "crooks in white gloves". During the last year or two Argentina has openly proclaimed that it will spend its reserves on arms imports. During 1981 Argentina emerged as I think the only country which in recent years has doubled its arms purchase bill, thereby shooting ahead of the field. And, of course, Argentina, which has a large nuclear reprocessing plant not under international safeguards, is the only country in Latin America to have rejected not only the Treaty of Tlatelalco, which makes South America a non-nuclear zone, but also the Test Ban Treaty and the Nuclear Proliferation Treaty. Nevertheless, they are accorded IMF facilities, and the only comment the IMF has had to make on the nuclear programme of Argentina is that, being in the public sector, it is a bad thing and it ought to be in the private sector. I think one must make what judgment one best can of such values in their practical application.
My noble friend Lord Taylor has reminded us that the third world debt is at present 600 billion dollars, and I think we should also remember that the third world is responsible for 80 per cent. of world arms imports. Here I want to follow rather closely in Lord Eccles' footsteps. That is one reason to think that the politicisation of the IMF might now be due. Another reason is the sheer size of the problem, and the way it may be described, not implausibly, as the "debt bomb". The "debt bomb" is a phrase used by Mr. Maurice Bishop the Prime Minister of Grenada. I see that Lord Pitt is in his place and hope that perhaps time will see Mr. Bishop so converted that he fetches up in this House as well. Mr. Bishop speaks of using the debt bomb. What he means by this is that the debtor countries of the third world should get together and organise a simultaneous default, on what they hope will be their own terms, and just see what happens. His motivation, of course, is not disreputable. It is to force the pace of that redistribution of wealth between the North and South of the world which we all know is necessary if the human race is to survive in order. The extreme formulation has, of course, been rejected by the Non-Allied Conference in New Delhi; he did not get that phrase into the Declaration. But they did adopt something not too far from this general view of the future when they agreed that there should be collective debt negotiations, collective between the third world debtor countries. That is one side of it.
The other side is the manifest thinning of the backing, in the developed world, for these loans by the changing of the rules regarding the amount you have 1137 to have to back a loan, and also the thinning of the backing required from the debtor countries, and by the revaluation of that which you have to have to back a loan, in many ways which time prevents me going into. I do not want to pitch it too strongly, but I believe that it may be time for the IMF to answer those calls which are heard round the world, and also from certain quarters in Washington, including Mr. Schulz, to go away from the improvisation which has prevailed in recent years and to adopt something which might be called regulatory direction; that is to say, that the recipient countries should be directed in a more qualitative manner what to do about their economies and not so much in a simply neutral quantitative manner.
On the point of restructuring, which I suppose is generally now taken to be a code word for running the IMF and the World Bank and the IBLD together into a sort of super World Central Bank, there is no point, in my amateur opinion, in doing this unless the general political thrust of the lending is at the same time changed. If we are able to change the thrust of the lending it may not he necessary to restructure the machinery; at any rate, it would be pointless to do it without. What I am suggesting is an increase in conditionality or a new interpretation of the word "conditionality". This increase would not be ruled out by the 1979 IMF guidelines on conditionality, where it seems to a plain man's reading that there are plenty of ifs and buts and many hedges; but Article 4 does state in so many words that, in helping members to devise programmes to help the debtors to adjust, the fund will pay due regard to the domestic, social and political objectives of debtor countries. If that is not enough to cover the arms race, I do not know what is. It is a question of judgment by the member countries of the IMF whether that should be used to achieve a desirable effect in world affairs.
I suggest it should be considered by IMF member Governments whether or not this directive, or other documents, could be used to seek to forward a regional arms control agreement in South America, where you have three very large, not extremely poor, but dreadfully indebted countries who are engaging in an accelerating arms race against each other, the fall-out of which has already singed our beard in a way we are not going to forget very soon. If that were so, it would be no more than a widening of the purposes of existing international arrangements, which is always an intelligent thing to do if it can be done. I think in general the moral is that we should not be any longer so terrified of political lending, since, in my submission, a good deal of the lending that goes on now is highly political, not so much by deliberate intention as by default. I hope that our own Government and other similar Governments may use the all too short time before the Williamsburg meeting to see whether such a plan might not be devised, not for immediate adoption—it is going to take quite a number of years to switch in this direction—but, at any rate, it is not too late to begin, if that is the right direction, as I believe it is.
§ 5.29 p.m.
§ Lord Lever of Manchester
My Lords, even in his absence I must put it on record how deeply grateful the 1138 whole House is to the noble Lord, Lord Soames, for his thoughtful, constructive speech—I am very glad to record that he is back in his place, in case my previous comment amounted to unintentional libel. The noble Lord's thoughtful, constructive and most stimulating Motion and the speech in support of it seemed to me to put the House very deeply in his debt. It has brought out so many contributions from other Members of the House I hope that no one will mind if I do not manage to include a comment on each one, as I kept finding myself in agreement with most of what was said. I hope that when the noble Lord, Lord Cockfield, replies he will find himself in agreement with the almost overwhelmingly benign and intelligent purposes of the House.
I was very touched by the noble Lord, Lord Boothby, throwing me back into my youth in the House of Commons. I used to hear with great stimulation and satisfaction his courageous and common sense purposes on all these financial matters. At the heart of them he was urging us to apply our minds to the techniques of using monetary issues to relate to the fullest deployment of our wealth-creating resources, and to make, thereby, our monetary mechanisms the servant of our legitimate creative purposes. I am glad to see that he is still of the same mind. Although I do not necessarily agree with him on every single issue, I have agreed with a great many over the years and have always valued his contributions.
I will say just one thing to the noble Lord, Lord Soames, but certainly not with any intention of offending him. He obviously regards me as more than an intermittent and temporary fount of party orthodoxy because of my presence on this Front Bench. Even in that brief reign let me trespass on the preserves of the Bishops' Bench by giving, as it were, a sacerdotal blessing to his purposes and his position. I cannot think of any single issue that he raised this afternoon with which I was not in the fullest agreement. I do not see why it cannot be a consensus in this House that we are all determined that these problems should be faced rather more intelligently than they have been in the past.
There are three central issues in the disturbed world money situation which threaten our recovery. They are three areas of great uncertainty and, I am sorry to say, three areas where for at least the last decade there has been continuous intellectual incoherence displayed by every one of the major Governments, perhaps including those in which I bore some minor share of collective responsibility.
These three areas are: the management of the exchange rates—that is, the parity relationships of one currency to another—the financing of deficits leading to and related to the banking crisis which has been discussed in this House before; and, finally, we must ask whether our leaders of the world will manage to plumb the same depths of inept incompetence in their responses to the collapse of OPEC that they displayed upon its rise, and bring economic miseries upon the world and maximise the difficulties in the world instead of responding adequately.
At the root of this decade of incoherence in these three areas—deficit financing, parity management and response to the oil cartel— is what the noble Lord, Lord Soames, rightly pointed out was a lack of the 1139 concepts of co-operation necessary for our prosperous interdependence to continue, which it has not. A great deal of that breakdown of co-operative internationalism was glossed over as a sort of Adam Smith view that if everyone looked after himself individually and every country looked after itself individually we would all prosper irresistibly. One gets the impression from some of these didactic spokesmen on behalf of the late Adam Smith that they read him, but carelessly. It is not very likely that if Adam Smith were alive today he would be opposed to traffic controls. He might possibly accept the traffic lights which have recently aroused the ire of the noble Lord, Lord Paget of Northampton, at Hyde Park Corner, but I think that in general he would be in favour of traffic controls and not snarled traffic, in spite of his sturdy belief in the value of individual effort in a market system.
Therefore, the central lesson that I believe we should get from the very wise and instructive Motion today is that if we want to tackle any of these great areas we must tackle them co-operatively. But it is not enough to have a sort of vague feeling of benign agreement. We must institutionalise that co-operation because that was a distinctive factor of post-war prosperity. It was not just some consensual rhetoric that was placed into the world. It was serious institutions like Bretton Woods, GATT and various other institutions which institutionalised the purposes of co-operation and made them durable, at least for a quarter of a century of unique wealth creation.
On the parity question little needs to be added to the many wise comments that have been made. We have to co-operate if we are to have an effective and stabilised parity policy. My brief statement on that is this. As a first step, at any rate, the leaders of the world should agree co-operatively and collectively that they will not permit the ludicrous and damaging grosser distortions of parity relationships that over and over again we have witnessed in the past few years. We all know the Government's position, their theory and practice. Their theory is very simple. If only one has a sound, wise Government that take wise actions, an obedient people who co-operate, and preferably an Opposition that applauds the wisdom of their actions, then the parity is residual; that is, one can leave it to look after itself and it will come to the right price in the market.
I must say that that theory has everything to commend it except that it bears not the smallest relationship to the facts of life of the past 20 years. Apart from that, it is almost irresistible. It is repeated with monotonous complacency by spokesmen on behalf of the Government, including, if he will not mind my saying so, the noble Lord, Lord Cockfield. It is all very well relying on this invisible hand—but it does not work. It produces monstrous and damaging results not only to ourselves but to others. We should have learned by now that one country's invisible hand seeking to correct its own difficulties may land a punch on the nose of another country. That has been notable in recent events.
Of course, the Government deny having a policy, but in fact they do have a policy as is seen from time to time: namely, they intervene when they get 1140 panicked and they find that their intervention is ineffective. One can hardly expect the Government to say, "Yes, we have a policy but only bring it out now and again when we are in a panic, and it is not very effective when we do bring it out". Obviously the alternative statement that they have no policy—not an impressive statement—is to be preferred.
But no Government in the world can seriously say that they are indifferent to the yo-yo nature of their currency's parity in the modern world. It is an absurdity. Our standard of life depends on it. Our trading relationships depend on it. Our import and export competitiveness depends on it. The value of our savings depends on it, as does even the dynamic of wage and price rises generally and its effect on society. It is an absurdity, and the Government should stop saying that they are indifferent to the parity. They have a strange view and I cannot quite make out what is their intellectual position—if I can dignify it with that polysyllable. Do they say that parities are wrong and that they can do nothing about it, or that the parities are right because the market says so? I do wish that they would tell us.
If they think that it was wrong but inevitable, then there are people who do not think that it is inevitable. It is inevitable if you do not have international co-operation, but you do not have to have your pound rocket up to $2.42 and then find it crashing down to under $1.50 while you tremble. Nobody knows where it is going to go now, by the way: up or down. I do not want to make any predictions, because they might not be particularly optimistic ones. But it is not good enough for the Government to say, "It is inevitable; there is nothing we can do about it". It is even more offensive for them to say that it is right, because the market said that it was right. That really has to be ended. We have to get a collective attempt by the leading Governments at Williamsburg to agree to intervene to prevent this.
I proposed this over a year ago in the House. I may say that, whatever differences of opinion the noble Lord, Lord Cockfield, and I have, he may rest assured that he enjoys my personal respect in the highest degree, whatever views any other persons may hold. I have every reason for saying that. The noble Lord said then that I was an incorrigible optimist because he had a cast iron opposition to this co-operation—America. He said they had declared as a sacred precept that they were not going to agree except in the gravest emergency. He said that I was an incorrigible optimist in believing that they would change their mind. I told him that they would, and they have. We have had the plainest statement from George Schultz, who is leading the world in this direction, and from Donald Regan at the Treasury. There were some noises off from Beryl Sprinkel in the background which give no cause for satisfaction. But he is not the power. You will find at this conference that America, Japan and Germany will all be speaking in the sense that was urged by the noble Lord, Lord Soames, and which I am urging today. I do hope that the noble Lord, Lord Cockfield, can give us some assurance that Britain will have a voice in sympathy and will not drag its heels.
I want to say a quick word on a very dangerous aspect of the world situation—the banking position. 1141 As most people know, what happened is that the formation of the OPEC cartel at the end of 1973 imposed massive sudden burdens, through the import of oil at the new price, on the poorest countries of the world. The Governments of the world should have sat down and answered the following simple questions: "Do we want to help these poor people to go on buying this oil? Do we want to help them with some investment in their economy, and, if so, how much as an aggregate? And, if we take that aggregate, who is to get it? How much from the aggregate and on what terms?" But this kind of simple, common sense outline strategy is something that our world leaders dislike. While they were pondering what might be done on behalf of the poorer countries, the banks stepped in and recycled the OPEC money. Most Members of this House will know what happened there.
There has, unfortunately, been an abdication by government, because, although everything seemed to be going merrily along from the end of 1973 until a year or two ago, this ramshackle system was defective in many important respects. First of all, only governments—and here I heartily agree with the noble Viscount, Lord Eccles—and nobody but governments, can organise the channelling into the right direction and the inhibiting when it tends to go in the wrong direction of these vast sums of lending. That is not neo-imperialism. That is acting in the interests of those countries to ensure that the purpose for which we are encouraging this transfer of resources—namely, the strengthening of these countries—is achieved. It is horrendous and staggering that so much of the money that was provided in these eight years—something like $650 billion to $750 billion—has gone in armaments, corruption and financing the megalomania of corrupt Ministers.
The sad thing is that in these countries, and in the advanced countries, there is always a lobby for lunacy. There is never a lobby for a sanity. None of the sane proposals are brought into discussion. If somebody wants to have an extra 10 fighter aircraft, there is a lobby in the supplying country and there is a lobby in the corrupt department of war where the Minister and all his acolytes are going to have their cut. The blame for this is squarely on the governments. The effects of this is that we have geared our economies and their economies to an uncontrolled flow of funds, whereby our exports are dependent on their demand, and their ability to keep their fragile political and financial situation going is dependent on this flow of funds. It has all come to a stop.
We are now in danger that our banking system is exposed, world trade is already damaged by the shrinking importations from those countries and political destablisation is proceeding apace there. The first thing that we have to do is to protect our banking system. I have not time now to dismiss all the populist fantasies that readily cross, belatedly, the minds of our leader writers at a time like this, about how it is time that we punished the banks and all the rest of it. The real problem is not punishing the banks; the real problem is maintaining them as healthy, strong, efficient, independent and able to perform their vital function in financing the world recovery on which we are all going to be dependent. Every dollar taken off the capital base of a bank is about $20 taken off its 1142 lending ability. That should be borne in mind when people are talking about the marginal question of what the banks can contribute.
The main central blame for the financial dangers we face now must lie with the governments. They encouraged this lending, they are the regulatory authorities and they are responsible to us for the safety of the banking system on which all our economies depend. I shall not at this late hour go into the mechanisms which have been explored by the noble Lord, Lord Taylor of Gryfe, but whatever they are, we have got to preserve in being a healthy, effective and independent banking system able to do its part not only in financing the poorer countries but in general international finance and in domestic finance for the recovery we require.
Let me say a little about the future and then I have done on that. I hope that the noble Lord, Lord Taylor of Gryfe, who is experienced in these matters, will not foster the illusion that a few magic strokes of the wand and the new lending that is needed in these countries will be forthcoming. That will be to repeat the anarchic abdication of governments in the past eight years.
When I made the proposal to the noble Lord, Lord Cockfield, he added to my other vices: having condemned me for optimism, he condemned me for impracticality when I said that, if you want sound financing, the simple rule must be that there has to be an outline strategy backed by the leading governments. They have to ask, "Do we want to help these poor people?" Some people do not. Some people say that it harms them. I happen to want to help these countries to get on their feet. They have to ask, "If we want to help them, how much, to whom, and on what terms?" If they do not do that, they will restore the same chaotic profligacy and misdirection of lending which has been taking place in the last eight years.
The only way that we can avoid that is not by action by any one country, but by the leading countries of the world sitting down, analysing the problem, agreeing among themselves what they are prepared to contribute to help throughout the world in this way and then formulating the mechanisms—in co-operation with the banking system no doubt, but with the banking system disciplined, as well as supported by, as it must be, these governments, if we are to continue in that role. That is all that I can say in general about that now. Clearly the IMF will play a part. If it is going to play its proper part we have to bring its mandate up to date or, in the jargon, we must open a new window related to this kind of long-term lending, not the emergency lending which is normally employed.
I conclude by saying this. I entirely agree with those noble Lords, including the mover of the Motion, who said that this Williamsburg Summit is going to take place at a crucial time for mankind. On its decisions and on its follow-up will depend whether we really do have the sustained recovery which we so desperately need in the world at present. I would like to feel—and I hope that the noble Lord, Lord Cockfield, can inspire this feeling in me when I have heard what he has to say—that the British Government are going to be prominent in restoring the kind of world co-operation 1143 in monetary and economic affairs that is so vital for the welfare of the world.
§ 5.51 p.m.
§ The Secretary of State for Trade (Lord Cockfield)
My Lords, I do not think that anyone would dissent from the aspirations expressed by my noble friend in the Motion that he has moved today. He spoke in terms of great moderation as well as forcefulness. His analysis of the situation was a comprehensive one. We have just listened to a speech from the noble Lord, Lever of Manchester, in very much the same vein. It was a speech of great charm and of insight. The noble Lord will not expect me to agree with everything that he says, least of all with the remedies that he proposed. Nevertheless, I must pay tribute to the sincerity and insight with which he spoke.
In the trailer for this debate which appeared in The Times newspaper this morning it was stated by the commentator at the end that:'What he"—namely Lord Lever—and indeed Lord Soames, will say has probably all been said before, and it is nonetheless relevant for that".The leader shows a remarkable insight into what noble Lords were going to say, but I feel that its verdict at the end is perhaps less generous than the circumstances of this debate would suggest, because I believe that a great deal has been said this afternoon which has added to our knowledge and our insight into these extremely important problems.
When we look back over the past, we in fact tend to do so through a golden haze of indifferent memory. If I may say so to the noble Lord, Lord Roberthall, when he refers to the world having enjoyed a period of some 40 or 50 years between 1931 and 1980 without a major recession, he rather overlooks the fact that there were quite considerable fluctuations in business activity and in world trade during that period. It is perfectly true that the scale of the present recession is considerable by reference to those earlier fluctuations, but that is because it has been sparked off by circumstances which of themselves are quite unusual. It is true that in the 'fifties and 'sixties we lived through a period of low inflation rates and expanding output. We are all inclined to look back upon those years as the golden years. They were, for the most part, years of Conservative Government, but I shall leave that on one side.
Of course, a great deal of the institutional framework was laid down in the years immediately after the 1939–45 war, the principal institutions being the Bretton Woods agreement, the IMF and the GATT. We ought to remember that both the IMF and the GATT not only remain in being, but in fact continue to do an extraordinarily good job. My noble friend Lord Soames, the noble Lords, Lord Roberthall, Lord Ezra and Lord Taylor of Gryfe, said that we must stand out against the forces of protectionism. But that, of course, is exactly what the GATT has been doing, within what I may describe as very, very difficult circumstances, with a considerable degree of success. The GATT, after all, does bring together some 88 countries, and agreement was 1144 reached—admittedly after a long period of discussion and negotiation in which the United Kingdom played a very prominent and, if I may say so, an extremely valuable part—that it was very important to maintain the open trading system. It set in hand various studies which were designed to reinforce and extend that open trading system. So we ought not, perhaps, to decry too much the success of the international institutions that we do have.
Let me touch very briefly on the question of the prospects for 1983, because this matter underlies the whole of my noble friend's Motion. There are signs that recovery is now getting under way in the United States, in this country and in other parts of the world. It is true that in 1981 there was the commencement of a recovery which was then cut short, mainly, I may say, by developments in the United States with the rise in interest rates which took place in the autumn of that year. But the prospects now look very much better. In the United States, as noble Lords will know because we have touched on this matter quite recently, the Administration have revised sharply upwards their estimates of economic growth this year. While originally they were expecting a rate of growth of the order of 2½ per cent. by the end of this year, they are now talking in terms of a rate of growth by the fourth quarter of 1983 in the region of 5 per cent. A slower inflation, not only in this country but in most of the leading economies of the world, and lower interest rates, provide the basis for the resumption of healthy economic growth.
What most industrial countries now expect is growth of the order of 1 to 2 per cent. during this coming year. There is reason to hope that the activity in developing countries may also recover. There are, of course, risks and uncertainties, but, nevertheless, taking these into account, the prospects for 1983, provided we stay firmly on course in following a responsible financial and monetary policy, are much better than they have been for many years past.
I turn to the question which has been raised of the international institutions in this field. The uncertain international environment has prompted calls—and these calls were repeated in this debate this evening—for new institutions; for example, a new Bretton Woods. Indeed, this proposition was put forward very informally by Mr. Schultz in a speech which he made towards the end of last year, although afterwards he said that he was merely thinking aloud. Two points really need to be made here. The first point is that no new international institution will solve the sort of problems which arise if there are serious divergencies in economic policy as between individual countries.
That is the first point and it is one of very great importance, because we have seen the result of this in the upset which has just occurred in the European Monetary System. Fortunately, and with considerable credit to my right honourable and learned friend the Chancellor of the Exchequer, those difficulties have been overcome. But if you have divergent economic policies, as you have had in the case of France, on the one hand, and in the case of Germany, on the other, you simply cannot avoid quite massive strains. The fact that these strains have been dealt with is important, but we ought not to overlook the lesson 1145 which lies there. Of course, it is true—and the point was stressed by the noble Lord, Lord Cobbold—that volatile exchange rates do cause problems for international trade and investment.
The development of forward and future markets has, to some extent, helped to cope with the risks associated with exchange rate fluctuations, but substantial problems remain. At bottom, the position quite simply is that exchange rate movements between the world's major currencies reflect instabilities in the world economy itself, and it would be surprising if it were not so. Massive swings in individual countries' balance of payments have been one cause. Exchange rate fluctuations also reflected differing rates of inflation. Unco-ordinated economic policies—for example, fiscal laxity, which places too much strain on monetary policy—in particular countries have led to high interest rates, and this has affected the pattern of exchange rates. The sharp increases in oil prices in 1973 and 1979 and uncertainty over future prices have also disrupted exchange rate stability.
In the end there is no way to suppress the effects of these instabilities. Attempts to try artificially to do so, either through exchange controls or through intervention in the markets, merely lead to sharp shifts in domestic interest rates and monetary conditions, and these are translating international disturbances into domestic markets. The only way to achieve exchange rate stability is through tackling fundamental instabilities in the world economy, and this can only be done through the convergence of economic performance among the major countries, and in particular overcoming high and varying interest rates in the major economies.
We are clear, therefore, that what is required is not a new institutional framework, but a strengthening of existing institutions coupled with responsible monetary and financial policies in individual states. As regards strengthening the existing institutions, I have already referred to the continuing work which is being done in the GATT in resisting the spread of protectionism, and I am sure that this has support throughout the whole of the House.
I should like to turn briefly to the IMF. On the occasion of our last debate on this subject which was initiated by the noble Lord, Lord Lever, in December of last year, he expressed great reservations about the ability of the IMF to cope with these problems, and he said that what then was needed was some new institution. But, in fact, the IMF has succeeded in coping with these problems, and it has done so without any major default occurring.
Agreement has been reached on an increase of some 47½ per cent. in the IMF quotas and as a result they will go up from 61 billion SDRs to 90 billion. The important thing now is that these quota increases should be ratified at an early date to make the increase effective by the end of 1983. The World Bank, of course, has been another major force in this field and one which does a great deal both to finance and to encourage development in the developing countries. As regards the International Development Agency of the World Bank, the sixth replenishment will total some £5½ billion, and the United Kingdom's contribution of £555 million to this has now been 1146 agreed. The important thing is that the United States should now agree their increase in their contribution to this fund.
§ Lord Lever of Manchester
My Lords, is the noble Lord saying that he is satisfied that the existing increase of the IMF and similar funds is adequate to insure us against the developing banking crisis and to ensure the steady flow of the required funds to the previous borrowers?
§ Lord Cockfield
My Lords, this is the point on which there is a fundamental difference of perception between the noble Lord and myself. As I said in December—and I adhere to this view—the present situation is a cause for concern but not for alarm. This is the difference. Steps were necessary; it was essential to take them. Those steps have been taken. The funds available to the IMF have been substantially increased—an increase of 47½ per cent. is a very large one indeed. The funds of the World Bank have been replenished. The most interesting thing here is the ability that has been shown, both by the international institutions and by the Governments of the leading industrial nations, to work together to deal with these problems. The noble Lord and my noble friend Lord Soames were both pleading, very rightly, for international co-operation, and here we have two instances where that international co-operation has been brought into play, and, if I may say so, has been brought into play successfully.
§ Viscount Eccles
My Lords, can my noble friend tell me what will happen if the IMF and these institutions lend more money to these third world debtors and all they do is to waste it, as they have wasted the money before?
§ Lord Cockfield
My Lords, if I may say so, my noble friend takes an unduly pessimistic view of the situation. In fact, the IMF imposes considerable restrictions. When it advances money it requires changes in domestic financial policy. This, in fact, we learned ourselves in 1976 when the then Administration raised funds from the IMF, and for a brief period during that Administration public expenditure had to be brought under control because of the influence of the IMF.
The IMF itself behaves in a responsible manner. I am not in any way saying that the problems which are faced—particularly in the Latin American countries—are not very great indeed. But no one in the world would gain if these economies collapsed. It is very important—and the point has been made during the course of this debate and it was made in the December debate—that these countries follow responsible domestic policies, and the pressures of the IMF are directed to that end.
Because, unfortunately, time is very brief, I now want to turn to the general question of the economic summits, and particularly to the Williamsburg Summit. The Versailles Communiqué in June 1982—and this was after the last economic summit—acknowledged that summit countries have particular responsibility to work for the greater stability of the world monetary system. Co-operation here is essential, and in the pursuit of these policies it is essential to maintain the external and internal values 1147 of currencies. The pursuit of soundly balanced and consistent monetary and fiscal policies contributes to external stability. Large fiscal deficits reflected in high interest rates can spark significant capital flows with consequent exchange rate instabilities.
The noble Lord, Lord Lever, is wrong, if I may say so, in saying that the Government are indifferent to the exchange rate. The policy has been stated by my right honourable friend the Chancellor of the Exchequer on many occasions. The exchange rate is one of the factors taken into account when interpreting domestic monetary conditions and taking policy decisions. But the one thing we cannot do is to ignore the effects of the enormous changes wrought by the increases in the price of oil in 1973 and in 1979. Nor can we ignore the effects of the fall in oil prices which is now occurring. The increase in oil prices in 1979 was followed by a big rise in the pound, and the fall in oil prices has been followed by a fall in sterling. These are simply the facts of life, and there is nothing that the Government—either this Government or any other Government—can do to stop the effects of massive changes of that sort feeding through into exchange rates.
Perhaps I may come specifically to the Williamsburg summit. This, of course, is attended by the heads of the seven major industrial countries. If I may make the point to the noble Lord, Lord Ezra, the President of the European Commission attends as an observer. He is not in fact a member of the summit, although there are large numbers of discussions which take place between the heads of governments and the President of the European Community. The discussions will include the outlook for the world economy. The summit will consider the policies necessary to ensure international stability and to help the recovery become firmly established without provoking a renewed upsurge in inflation.
It is particularly important for the major countries together to agree over the need to maintain prudent medium-term fiscal and monetary policies and to sustain their counter-inflationary thrust. The benefits of this policy are now evident in terms of lower inflation and lower interest rates. It would be misleading to believe that by adopting expansionary policies governments, either individually or collectively, could dramatically improve longer-term prospects for the world economy. Indeed, such policies would only serve to rekindle inflationary expectations and to undermine the basis of recovery.
But, of course, we have to recognise that we are dealing with sovereign states whose perception of their own internal interests and of international interests may, and do, differ from one another. Important examples in the past are the United States and France. This is a matter of real significance. It is a matter of real significance that both these countries are modifying their policies in a way which is helpful to world recovery. But the very existence of summits is testimony to recognition of the need—
§ The Deputy Speaker (Lord Ampthill)
My Lords, the time allotted for this debate has now elapsed. Does the noble Lord now wish to withdraw his Motion?
§ Lord Denham
My Lords, I am afraid that the House, by its own rules of order, is not enabled to grant my noble friend "injury time". I am afraid all my noble friend may do is to withdraw his Motion.
§ Lord Soames
My Lords, I think that there has been a good deal of "injury time", and it is a shame that we cannot take this debate on for literally another couple of minutes to allow the mover of the Motion to say a few words, if only in response to the Front Bench. But, of course, if my noble friend tells me that all that is possible—
§ Lord Denham
My Lords, I am afraid that these are the rules of order, and your Lordships are careful not to go beyond your rules of order, particularly on the short debates. I am extremely sorry for my noble friend, but my noble friend Lord Cockfield was interrupted once or twice. He had the bare minimum allotted to him by the rules, and I am afraid it is just not allowed.
§ Lord Soames
All right. Who am I, in view of the times I have asked your Lordships to stay within the rules, to go outside them myself? By farce majeure I beg leave, unfortunately, to withdraw this Motion in the hope that it will, in the event, have achieved some purpose.
§ Motion for Papers, by leave, withdrawn.