Orders of the Day — Sterling Exchange Rate

Part of the debate – in the House of Commons at 12:00 am on 28th September 1949.

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Photo of Mr Robert Boothby Mr Robert Boothby , Aberdeenshire and Kincardineshire Eastern 12:00 am, 28th September 1949

I do not think he sighed for 1906; but he did compare the Government of 1906 with the present Government, and that was not very flattering to the Government of 1906.

What has happened? All that has happened is that about four weeks ago the Government had brought the country to a point where only two alternatives presented themselves, and one of them had to be taken very quickly. Those two alternatives were drastic cuts in Government expenditure, both on Defence and on social services; or, alternatively, a drastic cut in the external value of the pound. Those were the only alternatives which then presented themselves to the Government and they chose—and I cannot blame them for choosing, in fact I commend them at that juncture for choosing, although they should never have had to make such a choice at that late hour of the day—a cut in the external value of the pound. I say that those alternatives were presented because for four years we had not been earning our living and our reserves were almost exhausted—[HON. MEMBERS: "War."] I do not count war, because that is a different affair.

Let us now go back a little. It has never seemed to me that the Chancellor of the Exchequer has really comprehended the underlying realities of our economic position in the post-war era, nor has he evolved a constructive long-term policy to deal with the problem which now confronts us. On his own admission, and he cannot deny this, he has been reduced to one expedient after another, which have led him in turn from one crisis to another. He has lived from hand to mouth on dollars; and now the end of the dollars is in sight. It is indeed a depressing experience. For five years we have been gravely handicapped in this country by an overvalued pound. But what is it that has kept the pound sterling at the artificial rate of $4 throughout these years? It is the Bretton Woods Agreement. I would just mention, in passing, that we were not allowed by the present Government even to discuss the Bretton Woods Agreement when it was submitted to us for approval. I well remember that evening, and the protest that a few of us made; nevertheless, not one word of discussion was allowed by the Government to this House before we passed that Agreement, which has had such formidable repercussions on our economic and domestic life.

Then came the acceptance by the Government of free convertibility, under the terms of the Loan Agreement; and also of non-discrimination not only in that Agreement but again at Havana. At least I am on the record as having opposed them all. I submit that the Government should have gone to the Government of the United States at least three years ago and said: "Look here, a new situation is developing. We cannot go on with absolute non-discrimination in our present situation. We must build up a regional trading area more rapidly than we are doing; and we must have more flexible exchange rates than is possible under the Bretton Woods Agreement. You must see this; otherwise we have no right to go on taking your dollars." If strong representations had been made three years ago, we could, I believe, have got a substantial amount of concessions and readjustments from the Government of the United States. As it was we carried on all over the world with exchange rates arbitrarily fixed, in a world of utter chaos, without any knowledge of the governing factors; and which the people who fixed them could never have contemplated would last for over four years. Finally the price of gold, almost the sole remaining asset of the sterling area, was fixed at an artificially low price, which was surely crazy.

When convertibility came along this country financed the entire world dollar deficit for five shattering weeks. I vividly remember the evening when the regulations to establish free convertibility of sterling were brought before this House. The Chancellor of the Exchequer did not think it worth while to come down, it was so unimportant. He sent the Financial Secretary to the Treasury, who was absolutely charming, as he always is; but not entirely convincing. I said that I thought that the Chancellor would not be able to hold convertibility, and would have to abandon it. The Financial Secretary thought that my prediction was wrong, and that the Government's prediction was right. He received the support of the hon. Member for Chesterfield (Mr. Benson), who said that our doubts were the wildest exaggerations of the possibilities of the Agreement, and were purely partisan. Five weeks, and they were rough weeks, put an end to that.

Non-discrimination, which theoretically goes on at the present time, means that we have been unable to build up any kind of regional trading area, that international trade has been throttled down to the lowest common level, and that we have been driven into pure bilateralism by the relentless pressure of events. It was under these conditions that the Chancellor told us not long ago that his primary goal was the achievement by this country of complete national economic independence by 1952. He proceeded to impose an absolutely rigid economy on this country. Finally he said that never, no, never, would he devalue the pound. There was not the slightest intention of doing that. All this just does not add up, or make sense. The policy was almost entirely contradictory. At the very moment when flexibility was the first desideratum in our economy, wages, prices, interest rates and exchange rates were all frozen. We thus became enmeshed in artificial rigidities of our own deliberate creation. When pressure and tension began to grow, something had to break; and what broke was the pound. That is one of the penalties of a rigid national economy.

Let no one hail it as a triumph. It means an all-round reduction in the standard of living of this country, because it means an all-round reduction of real wages. We had better face up to that. It is no use "kidding" ourselves that it does not mean an all-round reduction in the standard of living; this is the really nasty thing about it, and we have to face up to it. If it does not mean that, then we shall be back precisely where we were, with this difference—that the higher price of commodities imported from overseas is bound to lead to large-scale unemployment in this country. If it does not mean a reduction in our standard of living, if wages and salaries catch up with prices in the next four or five months, we shall be worse off then before we embarked on the policy of devaluation. There is no escape from that. What rather shocked me about the Chancellor's wireless speech was that he seemed to regard the whole thing as something in the nature of a triumph. It was a major defeat for him, if for no one else.

I do not for a moment believe that the Chancellor's repeated assurances were a piece of deliberate deception on his part. On the contrary, I believe that right up to the moment he left for Switzerland the Chancellor thought that devaluation would not be necessary. I have in mind the assurance he gave at the end or middle of July to my hon. Friend the Member for Central Aberdeen (Mr. Spence), when he stood at that Box and thumped it, and said that there was not the slightest intention of devaluing the pound. I happened to be standing in the Chamber when he said it; and I will never believe that he deliberately made that statement believing it to be untrue. On the contrary, right up to that moment he thought that he could hold the pound. It casts a serious reflection not upon his integrity, but upon his judgment. That is his trouble.

It was his colleagues who, after he had gone to Switzerland, really began to get down to sizing up the situation, and who imposed devaluation upon him after he returned, under the pressure of events. I believe that to be the true story. That is why I found his almost ebullient optimism—it was not quite so strong in the speech he made in opening this Debate as it definitely was in his broadcast address—so extraordinary. Whether he is pleased or not, the last thing that should be done is to minimise to the British public the present danger of inflation, because the dangers are enormous, and no one yet knows how serious they really are. We cannot know for a few months. It is no use telling people, at this moment, that there is only to be a small rise in the price of bread, and nothing else. That is frightfully dangerous.

I have never for one moment believed that complete national economic sovereignty, free trade, free convertibility, and exchange rates fixed even provisionally between currencies of deviating internal purchasing power, could be made to mix. I have always believed that the structure created at Bretton Woods must crash, as crash it has. I therefore do not complain of devaluation as such. It was inevitable. What I do complain vehemently about is the method of devaluation. Like all precipitate and ill-considered action, it has caused the maximum dislocation and given the maximum offence everywhere. That is what I complain about. Also I think that, if timely action had been taken some months ago, the thing need not have been as drastic as it now is.

What have we got at the end of it? Another rigidity. We are now fixed at $2.80, and what is that? It is only another guess. Is there any particular reason to suppose that that guess is any better than the guess made at Bretton Woods? We do not know. We cannot know anything. The difficulty is that the two great precedents, the precedent of Poincaré in the 1920's, and of Neville Chamberlain in the 1930's, when we were driven off gold, cannot be applied at the present time, because there is no confidence in the present administration. That is what really makes the situation so difficult.

I do not like this fixed rate. I would have liked to hear a statement on the part of the Chancellor of the Exchequer that from time to time he would revise the rate up or down, in accordance with prevailing conditions. That is the least that I would liked to have heard. I would have really liked a re-establishment of the system which worked so successfully between 1934 and 1936, when we had an Exchange Equalisation Fund which really worked, and kept a comparatively stable exchange rate, because there was world economic confidence in the Government of that time.