I had no idea what the right hon. Gentleman was going to say. He does not take me into his confidence before he makes these announcements.
This debate provides an opportunity for a frank discussion about the sterling position, the sterling area, and the internal economic and financial position. I will begin, as the Chancellor did, with the external position, which drove the Government into the panic measures of 19th September. I think I can fairly claim that, over the past year, the Opposition have shown great restraint in its discussion of the sterling position, more restraint perhaps than was shown by present Government supporters in 1948 and 1949.
Last December, for example, the Prime Minister, who was then Chancellor of the Exchequer, in order to make good the ravages in our reserves caused by the Suez policy, which we bitterly opposed, announced a massive programme of borrowing and of mobilising of reserves from abroad. On that occasion we immediately pledged the full support of the Opposition and of the Labour movement for any measures properly directed to strengthening sterling.
That would have been a very easy occasion for making party capital. We did not do that. [Laughter.] This is on the record, and I challenge any hon. Gentleman to find any time in the past year when we have made party capital out of the position of sterling and of the £. I challenge them also to look at their own record in 1949. What we did was to warn the Government that they must use the borrowed money and borrowed time on which they were living to strengthen our economic defences and make them secure and fast against any attack that might come from abroad.
The Government ignored that warning. We told them that what was needed was not merely further twists of the monetary screw or more vicious little jabs at the social services, but a comprehensive, radical series of policies at home and abroad, some involving action upon an international scale and some involving action by this country in regard to its overseas policies. Certainly, there was needed a complete change in our internal policies. For two years and more these warnings have fallen on ears that have been deafened by complacency.
There can be no doubt about the gravity of the warning which we gave in the Budget debates about what was going to happen this summer. We were accused of being too gloomy. By July, the Prime Minister, in his "never-had-it-so-good" speech, was boasting about the improvement in the reserves in the first half of the year.
Let us look at the figures for the first half of the year, the seasonally favourable period for sterling. The reserves rose by 248 million dollars. That is the figure of which the Prime Minister was boasting. It included special borrowings, the American waiver, and German aid. These amounted, in the six months, to 332 million dollars. So over that period of six months, the seasonal period for sterling, the out-turn was less by 84 million dollars. I have just said that there were 332 million dollars of special aid in the first half of this year; they came on top of the 591 million dollars borrowed or mobilised by the Government in the last quarter of last year.
I ask the House to weigh the importance of these figures. The sterling area has had, since Suez, a year ago this week, borrowings or special aid amounting to a total of 1,060 million dollars, and yet our reserves at the end of last month, allowing for E.P.U., were nearly 600 million dollars less than at the same date last year. That means there has been a real loss on the gold and dollar reserves of more than 1,600 million dollars over the past 12 months.
That is the out-turn of the Prime Minister's stewardship at the Treasury and of the Suez policy. That loss far exceeds the loss in 1951, the year of the world financial crisis which followed Korea, and the year which provides the inspiration for almost every speech that the Prime Minister makes on economic affairs.
Yet, when we debated economic affairs on 25th July, what had the Chancellor to say about the external position? I will quote his exact words. He said:
The external outlook is good.
He went on:
The cause for concern is neither industrial stagnation nor a balance of payments crisis."— [OFFICIAL REPORT, 25th July, 1957; Vol. 574, c. 641.]
The right hon. Gentleman said the same thing in a very complacent broadcast on television in the same month. Eight days after 25th July we had entered August, a month in which we lost one-fifth of our total sterling area gold and dollar reserves, despite the receipt, in August and September, of £75 million of German aid—Adenauer aid—in the form of a ten-year advance debt payment.
Speculation has been blamed. The Chancellor has fairly said that there must have been a reason why the £ was singled out for that speculation. I believe that the major reason was the complacency and utter paralysis of leadership which the Government showed in the debate of 25th July. The Chancellor's only contribution was the appointment of three distinguished elderly gentlemen to prepare sermons to be addressed to the trade unions, though not to the landlords.
It was the Prime Minister's speech on that occasion which caused the despondency. The nation, and indeed the world, were looking to him for a lead. We had a very serious debate and most of the speeches were serious and constructive on both sides of the Chamber. A serious debate was changed by the winding-up speech of the Prime Minister into his usual knockabout act. It was brilliant, amusing and very encouraging to his supporters, except to one hon. Gentleman who announced that he was not going to vote, but it was utterly devoid of responsibility or leadership.
We all remember what the Prime Minister did. He seized upon an announcement made by my right hon. Friend the Leader of the Opposition a minute before that we should divide the House. Seizing upon that, the Prime Minister said he regretted that he was now forced to regard the debate as a party political occasion, so he took from his pocket a carefully typed political oration. [Interruption.] I have not suddenly announced a change in my attitude to the debate as the Prime Minister then did. If we cannot congratulate the Prime Minister on his leadership and grasp of economic realities we can at least congratulate him on the speed and efficiency of his typist.
From then on, during the rest of his speech, we had the 1951 saga and a description of the shortages that the nation was facing in the years immediately following the war. That is the sort of thing that the Spectator meant when it said, on another occasion:
Faced with the choice of being a small-sized statesman or a large-sized party politician, Mr. Macmillan chose the latter role.
We had not a word from the right hon. Gentleman on that occasion about the serious external position of the country. Yet within eight weeks following the speech the gold reserves fell—if we allow for the E.P.U. settlement and for German aid—by more than a third.
This extraordinary complacency about the position continued even in September, when the Chancellor of the Exchequer went to Gloucester to make a not unsuccessful intervention there on behalf of the Liberal candidate. I have studied his speech in the local Press. It was not a serious analysis at all of the present position. Then, of course, we had, on the very day that the Bank Rate went up, the document "Work for the Nation" published by the Conservative Central Office.
This complacent, self-satisfied document must be taken as supporting the Lord Chancellor's contention that no one in the Tory Central Office could have known what was in the Chancellor's mind. It says—and this was in September, after this heavy loss of gold:
The return to a sound monetary policy in itself did much to restore confidence abroad.
I suggest that it is time that the Government and the House faced up to the real realities of the sterling position.
I have said that we on this side have shown restraint in our discussions on these matters and indeed two days before the Bank Rate went up, as the Chancellor fairly commented, my right hon. Friend the Leader of the Opposition, in a speech at a very big international business gathering, came out strongly against those who were trying to talk down the £. He attacked speculators and said, with great firmness and vigour, that there was no suggestion at all that our prices were out of line with the markets of the world.
In view of the temporary respite in the position of sterling—the Chancellor has said today that sterling is getting stronger and that we are winning the battle—I think that we are entitled this afternoon to state the full facts about the sterling position.
We believe that, looking ahead, sterling can be saved only by frank recognition of the size of the problem and of the steps that need to be taken. Let us look at the last three years. In 1955, under the Lord Privy Seal—and we are all glad to see him back and, we hope, fully recovered—we lost 642 million dollars for the year. As the Prime Minister hastened to tell us shortly afterwards, that was one-quarter of our reserves.
In 1956, when the Prime Minister was Chancellor of the Exchequer, and when we allow for all his borrowings, the real loss of gold and dollars was 734 million dollars. This year, so far, again allowing for borrowings and the German contribution, we have lost 866 million dollars. So the total loss in the three years—we hope that we shall get some back this month and in November—was 2,240 million dollars.
I think that the House must be reminded that but for all these borrowings and special aid the total volume of the reserves today would be about 500 million dollars. That is about one-third of the figure at which they stood when Sir Stafford Cripps devalued the £, four years after the war. I think that this needs to be stated. Perhaps I might put it in another way, and I am sorry if this is likely to destroy the oratorical stock in trade of a number of hon. Members opposite.
In the last three years the real loss of gold and dollar reserves was over 2,200 million dollars. In the last three years of the Labour Government, including both 1949 and 1951, about which we hear so much, the reserves net rose by 261 million dollars, compared with a fall of 2,200 million dollars under this Government over the last three years. These are comparable figures. [An HON. MEMBER: "Dollar loss."] There was no dollar loss in 1949 to 1951. I have taken fully into account the whole receipt of Marshall aid during this period and the figures are on a strictly comparable basis.
I hope that the Government will not be complacent because of a short run improvement in the exchange rate. I thought that the Chancellor seemed a little complacent about that today. This has happened in the last three years, every time we have had an increase in the Bank Rate or a crisis statement. If it were not for wearying the House, I could quote the figures in each case and the complacent utterances from a member of the Government every time the exchange rate went up immediately following the Bank Rate, and then quote the exchange rate fall again in a few weeks, or, at most, three or four months.
By July, 1955, the £ was back again at its support price. In October, 1955, Ministers were claiming credit for improvement—" we were winning the first round of the battle"; but by February, 1956, the run on sterling was such that the Bank Rate had to be put up to 5½ per cent., which was then considered high. By 26th July, 1956, it was down again to just over 2·78, and that was the day before Suez.
I hope, also, that there will not be any complacency either about what we hope will be the more reassuring gold and dollar figures for October and November. This is bound to happen. The extent of bear speculation and the postponement of trade payments was so great that there must be considerable covering. The further the tide goes out—and it went out a very long way in August and September—the higher it usually comes in. The speculation in August and September was the action of thousands of individuals at home and abroad who were hedging against devaluation, and so they hastened their out-payments and deferred their in-payments.
When devaluation did not occur at the expected date—that was the Washington International Monetary Fund Meeting—the short accounts had to be closed and, of course, bears began to cover. I believe that without the 7 per cent. Bank Rate this would have happened, once it was clear that the Government were determined to maintain 2·80 dollars. It happened in September, 1955, and every other time, and each time the Government complacently assumed that the problem had been solved and that all would be well.
For this reason, I believe that the immediate position of sterling ought to be safe enough. First, there is the bear covering, which has still a long way to go, especially after those who went into the bear position on a three month basis, maturing in November; and, secondly, the country is moving into the seasonally favourable period for sterling.
I think that we must be frank about the dangers that lie ahead. Suppose there is another crisis of confidence next autumn. In this connection, I wonder whether I might suggest to the Chancellor that, since devaluation fever usually takes hold on the eve of the International Monetary Fund meeting, could it not be arranged that these meetings should take place during sterling's seasonally safe period instead of during the period when sterling is under heaviest pressure? That is a reasonable suggestion. It is not only to Britain's advantage, as sterling is a world asset: other currencies, too, are prone to speculation.
Speculation may also come—many people are talking about it—from the fear that the Government have it in mind to widen the margins between which sterling may move. Many people believe that the Government would like to widen it, but they feel it can only be done from a position of relative strength and not a position of weakness. I hope that the Chancellor will deal with these rumours once and for all and make it clear that he is dealing with them for a long time ahead.
The second danger comes from the changing nature of the sterling area. I had things to say about this during the Budget debate. When countries like Ghana and Malaya achieve manhood, we not only give them a latchkey, we give them a cheque book as well, with the free right to draw on their sterling balances, in dollars, if they wish. Most of these countries have big development programmes which are of the highest political, economic and social priority, as we have seen in the case of India, and these programmes will not be sacrificed in order to maintain the level of sterling balances.
There is now a new and very ominous development. That is the fall in commodity prices which gravely affect their current earnings of the very countries that we are talking about. If cocoa prices are low, Ghana may draw on her balances simply to maintain expenditure. If rubber falls any more—in fact, rubber prices have only been maintained during the past week or two by the utterly fantastic Russian purchases—Malaya may also draw on her sterling balances. For these reasons, unless the commodity position is reversed, we must expect sterling balances to be run down, and, perhaps, partly run down in dollars. Whereas last year this running down of the sterling balances was offset by a very favourable Australian surplus, it looks rather doubtful whether that will continue this year because of the fall in wool prices and the effect of the drought on Australia's export earnings.
The third danger is, I think, in the minds of all of us this afternoon. That is the great change in world economic conditions. For five years we have been free from the world dollar shortage. This year the world dollar gap has re-emerged. Although that gap has narrowed after the emergency oil purchases it is still there, while added to it has been the effect of the Deutschmark position in drawing off world liquidity. On top of that we have some menacing signs that world inflation is giving way to possible world deflation. I think that too much attention is being given to Wall Street in this connection and too little attention to the very serious slump in commodities and freights. What some of us have been saying for some time has been powerfully reinforced by the letter in The Times today from a number of Oxford and Cambridge economists, showing a remarkable degree of unanimity in the economic profession.
We know that classically a world commodity recession has been followed throughout the decades by a world industrial depression. I remember working, in the years before the war, with Lord Beveridge—then Sir William Beveridge—in some research into the trade circle. We found that practically every trade depression began with a collapse in world commodity prices. Let us hope that this will not develop further; America may reactivate her immense purchasing power, but the actions of the Government, over the 7 per cent. Bank Rate and the credit squeeze are pushing that along.
If it continues we must expect three stages to follow. The first effect will be one which appears favourable to us, an improvement in Britain's terms of trade, import prices will fall and export prices will be maintained, or rise. This, in fact, is already happening and it will generate more Governmental complacency. They will tell us about this increasing paper surplus on current account, but there is nothing to be complacent about in the present situation.
The terms of trade are improving because import prices are falling, world primary commodity prices are falling, but our export costs are still rising at a time when the export prices of our main competitors—the United States and Germany —are now beginning to fall. I agree with the Chancellor that if we are entering possible world deflation that means that more than ever we cannot afford to be an island of inflation in a deflationary world. I said that last week in the Manchester Guardian. Nevertheless, if our main competitors are reducing their export prices and ours are still rising we may face a still more competitive position.
I think that in the second stage sterling primary commodities suffer most. The effect there, of course, will be that we shall begin to lose dollars as the Commonwealth countries get fewer and fewer dollars for their exports to the dollar area. Also—I think this ought to be said—invisible earnings, which are fairly strong at the moment, stand to suffer if freights remain low and oil prices fall. The third stage, if commodity prices go much further in this direction and the present movement is not reversed, will be selling difficulties for our exports abroad. That has happened in every internal depression for a century and a half. Unemployment in this country always began in the export trades and the export trades lost their markets because of monetary depression in the primary producing countries.
Suppose that happens with the inevitable consequences to our dollar position. I do not know what the Bank Rate is likely to be by that time, but, if it is still high, we shall have the Government still relying on monetary policies and interest rates without a shot left in their locker. Turning to the internal measures——