I am pleased that it has been found possible to arrange a debate on the international monetary situation so soon after the events of 10 days or so ago. On two occasions I then reported to the House, but obviously it is much more satisfactory to set out the developments at greater length, and this debate gives me the opportunity.
It would probably be for the convenience of the House if I began with a short account of the events leading up to the recent crisis and of the negotiations that took place to find a generally acceptable solution to it. I will then go on to say something of the consequences for the United Kingdom economy and for the development of the EEC, and finally, in view of the two important meetings next month, one in Europe and one in Washington, dealing with the reform of the international monetary system, I think that hon. and right hon. Gentlemen would wish to hear something from me about progress on that front, in particular whether it has been affected in any way by the recent difficulties.
The first point I want to make is that it would be quite wrong to point to any single action as being the cause of the recent disturbances, because those disturbances reflect a complex of underlying factors. The pressures in the foreign exchange markets began to build up after the decisions of the Italian authorities to introduce on 22nd January a two-tier market separating commercial from financial transactions, and of the Swiss authorities on the following day to allow the Swiss franc to float until, as they said at the time,
the situation had become a little quieter.
Looking back I believe that those moves fostered doubts in the market about the viability of the exchange rates structure which had formed the basis of the agreement we reached at the Smithsonian Institute in Washington in December 1971. Then, as the House will re-
member, there was the publication of figure of six billion dollars for the United States trade deficit in 1972. That added fuel to an already somewhat combustible situation. In the first few days of February the dollar required heavy support in Europe and in Japan. The deutsche-mark particularly was in strong demand and the German authorities tightened their controls on inward investment in Germany and on foreign borrowing by their residents.
Those measures and the continued willingness of the central banks to support the dollar caused a momentary lull, but, as we now know, this proved to be only the quiet before the storm. The Bundesbank had to buy in a massive amount of dollars in the week ending 9th February. Once again, the scale of movements of short-term funds proved bigger in this crisis than in the one before. This time, between 23rd January, when the Swiss franc was allowed to float, and 9th February, the dollar was given support totalling in all 8½ billion dollars, most of this in Germany but to a large extent also in Japan.
It is of course very difficult—I think one might say almost impossible—to determine the source of the funds being transferred from one country to another when such vast amounts are moved in a few days. In any case, I think one must recognise that it is only common prudence for those responsible for large funds to seek to use all legitimate means to safeguard the value of the assets in their trust. We ourselves had experience in June last year of the vast sums which can be mobilised in times of uncertainty.
Nevertheless, if international trade is to develop as we wish in the interests of prosperity and if the financial resources of the international community are to be available to the countries where they can be used most efficiently, then our energies should be concentrated not primarily on a search for greater restrictions but in an effort to create a world monetary system in which the scale and the damaging effect of short-term capital flows can be minimised.
Why was it difficult to make this identification? Was it perhaps partly the result of actions of very big multinational companies, information about which is not available to national Governments?
I think there is no doubt at all that the large multinational companies play a major part in this, but it is also only realistic and right to recognise, as I said a few moments ago, that those responsible for large funds naturally use all legitimate means available to them to safeguard the value of the assets in their trust. I think it right to recognise that, but I agree with the hon. Member. I think he is right in saying that the funds of many large multinational companies play a significant part in this.
So much for a brief chronicle of the events up to Friday, 9th February. What, in fact, was at issue? In the last days of that week the international community was confronted with problems in world monetary relationships comparable in scale with those of 1971, which, the House will recall, took four months to resolve, and comparable also in momentum with those of the five days last June which precipitated the decision to float the pound.
Essentially, the situation confronting us had two ingredients. First there was the persistent weakness of the United States dollar, and secondly, there was the large and continuing surplus in the Japanese balance of payments. That surplus was the counterpart of much of the huge United States current account deficit in 1972 to which I have referred.
The difficulties to which those two factors gave rise developed with remarkable speed and on an unprecedented scale. But it is also noteworthy that there has been no precedent for the speed of the co-operative effort with which new arrangements for the main currencies concerned were achieved. The House will recall that a solution was found to this critical situation at the cost of only one full day's interruption of international transactions. The foreign exchange markets were closed on Monday, 12th February, but within only a day or two most of them were able to open again for business.
Naturally, this speedy action meant an intensive programme of international negotiations. I think the pattern of negotiations which took place is now fairly well known. Monsieur Giscard d'Estaing, the French Finance Minister, Herr Schmidt, the German Finance Minister, and I met in Paris on the even- ing of 9th February. That meeting took place at the request of Herr Schmidt. We met together to consider whether, in the absence of action by countries outside the EEC, it would be possible to establish agreement, before the exchange markets opened again, on effective measures on an EEC basis such as an extension of the two-tier system or the initiation of a joint EEC float.
It is important to remember that at that stage we did not know whether the United States had some specific proposals to make, although it was, of course, known that Mr. Paul Volcker, United States Under-Secretary of Monetary Affairs, had just arrived in Bonn from Tokyo. He saw Herr Schmidt in Bonn on 10th February and then came to London that same evening. That evening he discussed a number of possible courses of action with me in the greatest confidence, including a proposition which was very close to that which was in fact subsequently adopted.
The following morning Mr. Volcker went on to Paris and to Rome and he returned to Paris that evening, 11th February. On that evening I went to a second meeting in Paris, at which Signor Malagodi, the Italian Finance Minister, was present, as well as Monsieur Giscard d'Estaing and also Herr Schmidt. At the end of the evening we invited Mr. Volcker to join us, and after further discussion he told us that he would be reporting to the President on the results of the conversations he had had.
As a result of this series of consultations, we were able to reach an agreed view on the most appropriate action. I only regret that because of the extreme urgency of the matter and also the practical difficulties, which I think will be self-evident to hon. and right hon. Gentlemen, the consultation had to be limited. But it should be remembered that in 1971, when we were also faced with a dollar crisis, following the American measures of 15th August of that year, the series of major international meetings did not reach a solution until December and the exchange markets were substantially upset for the whole of that period from August to December.
I strongly support the point which the right hon. Gentleman has just made, but would he agree that this indicates that the way in which the European Community theoretically plans to handle this sort of crisis is quite inappropriate to the nature and scale of the problem?
On this occasion there were very considerable practical difficulties in the consultations. I am sure the right hon. Gentleman will understand that I have given only an outline of the meetings which took place, but I think it also right to say that I had a fair number of telephone conversations both within Europe and across the Atlantic. I agree with him that if we can evolve a better method of consultation within the very short time-scale necessary when these events blow up in this way, that certainly would be highly desirable. I certainly do not dispute that.
There were a number of possible courses of action, and it may be helpful for me to discuss some of them. First, there was the possibility—at least in theory—of a unilateral floating of the deutschemark, but the Federal German Government made it clear, notably at the meeting of ambassadors which they summoned to Bonn on 6th February, that they were averse from that course, and it was not seriously considered in our discussions. It is important to remember that although market pressures concentrated on the deutschemark, the German balance of payments was not in disequilibrium. Moreover, a deutschemark float would have done nothing to solve the problem of the yen.
Next, as I told the House on 13th February when I reported, the device of the two-tier markets was also discussed. But, while two-tier markets may in some circumstances have a role to play in damping capital flows, they are ineffective against various other types of problems deriving from the balance of payments. Two-tier markets cannot eliminate imbalances on current account, and they are powerless against leads and lags. I believe that the Germans took the view that a two-tier market would not deal with the strain to which the German authorities were being subjected and, in any event, it would be administratively difficult for them to set up, at any rate in a hurry.
Thirdly, there was discussion of the possibility of a joint EEC float either for all the members of the EEC or for the majority. But it soon became clear that this was not likely to be acceptable unless all nine member countries of the EEC joined in. The idea of this arrangement, if it could be successfully initiated and maintained, is that it would preserve the foreign exchange rates within the EEC, although the group as a whole would have a varying relationship with the dollar and with other rates fixed to the dollar or floating independently. Since overall imbalances with the dollar would be cleared in the market, it would remove the intolerable pressures which had come on individual EEC countries.
It was soon apparent to us that it would not be practicable either to resolve all the considerable technical difficulties involved in setting up a common float or to assess its probable effects on the exchange markets in the very short time available to us over the weekend. In this context it was relevant that a common EEC float would have done nothing to deal with the problem of the yen or of the United States-Japanese trade imbalance that seemed to be the fundamental causes of the immediate upheaval.
Although the Government, as I have said on many occasions, intend to return to a fixed parity for sterling as soon as conditions permit, I did not consider that the circumstances were appropriate for the United Kingdom to refix the parity in order to take part in a Community float. But the full potential of the European Community will not be developed until conditions can be created in which there is exchange rate stability within the EEC. It could be that, in certain circumstances, the most appropriate way to produce this would be some kind of collective float, and for this reason there will now be a substantial study of the large technical and economic issues which are involved.
Fourthly, there was the course of action which in the event provided the solution. It was the initiative of the United States to bring about a substantial devaluation of the dollar which offered the best course and, accompanied by appropriate Japanese action, this went direct to the roots of the problems with which we were faced.
It must be for other Governments to speak for themselves. It would not be right for me to attempt to speak on behalf of any other Government.
As I told the House last week, and I repeat today, the United States authorities made a very bold move, and the other countries concerned have responded and have been willing to co-operate in making the dollar devaluation effective. The United States, and particularly Mr. George Shultz, the United States Secretary to the Treasury, deserve great credit for the speed and resolution with which they reached their decisions.
Before my right hon. Friend leaves that section of his speech in which he has so clearly covered the possible alternatives which had to be studied, did I understand him to say that the EEC countries will study the technical possibilities of a combined float? Does this mean that the whole financing of the common agricultural policy is coming under re-examination?
What I said was that there would now be a substantial study of the technical and economic issues involved. They are very considerable, and in any event in the short time available I do not think that it was "on" on this occasion. But it is right that we should look into this to see what are the possibilities, because it may well be that in certain circumstances some kind of collective float might be the most appropriate way of achieving the exchange rate stability within the EEC which is obviously so desirable.
The right hon. Gentleman will be aware of the remarks of Herr Schmidt in Bonn about his attitude towards this matter which I confess—and I think the House will agree—were a little ambiguous. The House would like to be clear whether the Chancellor has committed himself in principle in favour of the combined float or has simply agreed to study the implications of a combined float so that he can decide at a later stage whether in principle or in practice it is a good thing.
There was a great deal of discussion over many hours. The two salient points are, first, that I did not consider that the circumstances were appropriate for the United Kingdom to refix the parity in order to take part in a Community float, and, secondly, that I was very keen that in the light of all our discussions there should be this substantial study.
I was dealing with the approach of the United States and I have paid my tribute to Mr. Shultz. I have no doubt that this was the right approach to a solution. I well remember—and many hon. and right hon. Members will recall—that in a similar situation in 1971 after the United States President had announced the various measures on 15th August, almost everyone all round the world was urging the United States to take action to devalue the dollar. On this occasion it was done, and it was done swiftly and decisively, in contrast to the long period of discussion and negotiation which preceded the Smithsonian settlement.
I shall say more in a moment about recent events and the need for a greater effort to bring about reform of the international monetary system. The fact that an effective dollar devaluation has been achieved, on the initiative of the United States, means that we have in practice already moved some way towards the greater symmetry in the adjustment process which is one of our main objectives for the reform of the international monetary system.
I turn now to the consequences of the dollar devaluation and the related arrangements for the United Kingdom. I will make two general points. First, changes in parities or in effective exchange rates do not and cannot be expected to have instant results. Secondly, the initial effect of an exchange rate change will be perverse. By this I mean that the deficits of the devaluing countries and the surpluses of the revaluing countries will each tend to increase for some time. Eventually, of course, the real effects on the distribution of trade come through and help to remove imbalances. But the process takes time and should be recognised to do so, so that trade and other signals in the so-called J-curve period are not misinterpreted.
Turning more specifically to the immediate effect of the momentous changes we have seen, it remains true that the foreign exchange markets have not yet settled down. A new and stable pattern of exchange rates still has to emerge. But the main effects of the changes will be to cause the United States market and some other markets which have stayed with the dollar to become rather more difficult for European goods. The Japanese market, on the other hand, should become relatively easier.
What I must make clear is that if we compare the current position with the situation immediately before the exchange rate alterations, the effective sterling exchange rate has changed very little. By "effective exchange rate" I mean the rate relative to those of all other currencies, taking account of their importance in our trading relations.
Sterling has strengthened against the dollar by about 3 per cent. but it has fallen against the combined EEC currencies by 4 per cent. and by significantly more against the Japanese yen. Overall, there should be little or no impact on the total of our trade or on the cost of our imports. We may lose in some markets but gain in others, and taken together these effects should broadly balance out.
It is right that I should refer specifically to the effect on domestic food prices. First, I can reassure the House about food prices covered by the common agricultural food policy. As my right hon. Friend the Minister of Agriculture announced in his statement to the House yesterday, we have agreed with our Community partners on special arrangements which will protect prices in this country from the effects of movements in the exchange rate. The new arrangements which my right hon. Friend announced will mean that even though the pound is now at a slightly lower level in terms of the unit of account in which agricultural prices of commodities covered by the CAP are expressed in the Community, this will not now cause any increase in the prices of these commodities in this country.
As the House knows, our policies in the standstill have been directed at restricting those domestic prices which are within our control—and as far as world food prices are concerned, the Government, like the previous Administration, have never pretended that it was possible to isolate the United Kingdom consumer from the effects of world food prices. But I do not expect the currency changes in themselves to have a significant effect on the price level of our imported foods. This follows partly from the special arrangements under the common agricultural policy which we have negotiated with our EEC partners, and partly from the fact, as I said earlier, that the effective sterling exchange rate is very little chanced.
I must make one further comment about the effect of the sterling exchange rate on food prices. In the present circumstances there is nothing more likely to affect confidence in sterling, sending the rate down and so raising the cost of imported food, than industrial action of one kind or another, and it follows that to maintain confidence in sterling and so keep down the cost of imported food there is no greater service that the Opposition could render the nation than to back the Government in the fight against inflation—and may I just add that in a debate on the international monetary situation I feel that that is the least we are entitled to expect.
The Chancellor of the Exchequer will not be surprised if I follow this element of what he has been saying in my contribution later if I catch your eye, Mr. Speaker. But would he clear up a contradiction between what he has just told the House and what his right hon. Friend the Minister of Agriculture told the House yesterday afternoon? The Chancellor has just told us that the effective devaluation against the European currencies is about 4 per cent., but the Minister of Agriculture said yesterday,
What has happened now is a reduction which will approximate somewhere between 5 per cent. and 6 per cent., as a further depreciation of the pound in relation to European currencies …".—[OFFICIAL REPORT, 21st February 1973; Vol. 851, c. 477.]
I hope the Chancellor will clear this up because he will be well aware that in relation to inflation and the balance of payments it is a major matter.
I have not the passage immediately to hand but I will look into it. If there is anything to clear up, it will be done by my hon. Friend in replying to the debate. But, subject to checking any incorrection, I believe the latest position to be that sterling has fallen against the combined EEC currencies by some 4 per cent. I will look into the point the right hon. Gentleman raised. The important point for the EEC, I believe, is that with regard to those commodities which are covered by CAP, as the result of the arrangements made by my right hon. Friend the Minister for Agriculture, the slightly lower level of the point will not cause any increase in the price of these commodities in this country.
May I endorse what my right hon. Friend has said, particularly on the subject of the strength of the British currency? One of our main buying competitors in world food markets is Japan, which is increasingly becoming a competitor for the foods we like to buy, and the strength of its currency is making Japan increasingly a more attractive market, so that the strength of our currency is absolutely vital to the hand of our negotiators whose job it is to purchase food abroad. This is a factor which many companies are feeling at the present time.
I believe that that is a very important point. It follows from the change in the value of the yen relative to sterling and has the consequences to which my hon. Friend referred.
I want to turn to the consequences of recent events for the European Economic Community and for progress towards economic monetary union within the Community, a point raised a few minutes ago. The situation following the decisions of the United States and of Japan was discussed at length in the Council of Finance Ministers of the EEC countries which I attended in Brussels last week. It is fair to say that the general conclusion which emerged from that meeting was that the decisions of the United States and Japanese were a positive, and therefore a welcome, move towards restoring equilibrium in international payments.
Those decisions certainly imply no setback in Europe's determination to proceed to greater integration, and world- wide equilibrium will be fostered and helped by the development of a strong European entity. We are going ahead with the European Monetary Co-operation Fund and are also studying closely together our common position on world monetary reform, the importance of which, I believe the whole House will agree, recent events have emphasised yet again.
At the International Monetary Fund meeting in 1971 I put forward on behalf of the Government proposals for reform of the system. These were built round the proposition, which I elaborated in some detail at that meeting, that a neutral reserve asset, the SDR, should in the main replace reserve holdings of national currencies. This seemed to me to be a necessary condition for the effective control of world liquidity and a system of general convertibility of currencies. I went on to point to the need for improvement in the adjustment process, and to the problem of capital movements—to which I referred again at the International Monetary Fund meeting last year. Those proposals were well received. Certainly, a number of us felt that the situation at that time provided the incentive to move forward to a strengthening of the system and, feeling as we did, I must admit to some disappointment that the progress made in following up those proposals was so slow. However, at meetings last summer under my chairmanship, first of 10 European nations and then of 30 Commonwealth Finance Ministers, agreement was reached on the basic objectives of reform, and at the Fund meeting itself last September we had a particularly helpful speech from the Secretary of the U.S. Treasury which showed that there is a great deal of common ground between us—and by "between us" I mean between a great many of those who spoke at that IMF meeting.
It was at that same meeting that a Committee of Twenty was set up to advise and report on all aspects of reform of the international monetary system. That committee includes the widest possible representation of world opinion consistent with a manageable number. Mr. Jeremy Morse, one of the executive directors of the Bank of England, was invited to be chairman of the Committee of Deputies which is, of course, a full-time job. A detailed programme of work was prepared by the committee in the immediately following weeks and the deputies have been working through this programme in a series of three-day discussions.
The discussions so far have been primarily directed to the balance-of-payments adjustment process and the exchange rate mechanism in a reformed system, together with the whole complex of questions falling under the heading of reserve assets and convertibility to which I have referred. Discussion is now required on the possible link between the allocation of SDRs and the financing of economic development—the so-called SDR-aid link—and certain aspects of the problem of capital movements.
These are complex questions and it would be wrong to pretend otherwise. They raise issues of a highly technical and a highly political character. The several elements of reform inter-relate in a number of important respects. The discussions have nevertheless so far been constructive and co-operative. A number of countries—for example, the United States and EEC members, including ourselves—have put forward detailed proposals in particular areas, as a focus for consideration.
If the Morse Committee is important in the long term, as it undoubtedly is, then in the more medium term has any assessment been made of the possible ending next month of the interest equalisation tax on portfolio capital and what that would mean to the relations between Europe and the United States?
My hon. Friend the Minister of State will be referring to that matter in his reply. Progress has already been made among deputies in the Committee of Twenty. I refer, for example, to clarifying the potential role of SDRs in relation to excessive reserve assets, and possible approaches, including the use of objective indicators, towards improving the working of the adjustment process. This technical work is essential if we are to identify clearly the main issues of principle arising across the whole field.
Within the nine countries of the EEC, we shall be reviewing all these matters at the Finance Ministers' two-day meeting towards the end of March, from which we shall go on to Washington for the meeting of the Committee of Twenty. Our objective at that meeting, and in meetings to come in the weeks thereafter, will be to reach agreement on the main decisions of principle which will enable us to put forward a comprehensive plan for reform at the Fund meeting in Nairobi in September.
I said at the outset that it is a good thing that we have had this opportunity to debate these important matters only 10 days or so from the great difficulties into which the international financial community was thrown. I should like to express my warm thanks to the Opposition for having made this debate possible.
There is no doubt that, while it is right and proper that when a Chancellor of the Exchequer returns from important meetings at which there have been far-reaching decisions with consequences for this country, and indeed for many others, he should report to the House of Commons, it is not possible to do justice to the situation in those reports merely by Question and Answer. Therefore, this debate has given me the opportunity of expanding on the situation a little more today.
It is important to recognise that these are by no means arid, academic questions. The decisions which we shall reach will vitally affect our economic policies I have talked about all the various aspects of the reform of the international monetary system. Whatever decisions we reach in Washington in those discussions of reform and thereafter will vitally affect our economic policies and the prosperity of all our people. The events of last week do not represent a setback in the work of reforming the international monetary system. On the contrary, they make reform all the more necessary and urgent. That is the task ahead.
I should like first to thank the Chancellor of the Exchequer for a comprehensivce narrative of the events that led to the resolution of last week's crisis. He clarified one or two points on which we have been unclear.
There is one point I should like to put to him—and if he does not wish to answer it now, perhaps his hon. Friend will deal with it later. He said that one of the possible solutions discussed by the European Ministers with Mr. Volcker was the devaluation of the dollar. Was it anticipated during those discussions that the size of the devaluation would be as large as it has proved to be? The German Government can by no means be regarded now has having an over-valued currency, or of having had an undervalued currency a fortnight ago, and was the right hon. Gentleman aware of the likely size of the American devaluation?
It is as well that I should answer, because I was the one who was at that meeting when Mr. Volcker came to London. Perhaps the best way I can answer the right hon. Gentleman, without disclosing any confidences, is to say that at that meeting we discussed a number of possible courses of action, including one proposition which we discussed and which was very close to that which was eventually adopted.
I must be satisfied with that reply.
Although I was grateful for the comprehensive narrative provided by the right hon. Gentleman, I regret to say that he showed himself to be a little too complacent about the general outcome of the crisis and some of its implications. What is clear from what he said is that the United States got out of this crisis everything that it tried to get in the crisis 18 months ago and failed to obtain at the Smithsonian talks.
It must be said that the international speculators made a very big killing, amounting to about 600 million dollars out of the German Government alone. Every time international speculators make a killing out of speculation on the possibility of currency changes, the probability is that they will seek to do so increasingly in future.
The Chancellor gave no indication that there had been any serious discussion of how to prevent this type of speculation occurring in the future. We are well aware that there is now around 100,000 million dollars-worth of Euro currency footloose and available for speculation of this type. The dollar component of that currency, on the best estimate I have seen, is about 70,000 million. So long as this is allowed to move at will, with the expectation of making a profit out of the change in currency parities which the movement itself may bring about, the international situation will remain vulnerable to the sort of crisis of the last few months, and the crisis to which the pound found itself so vulnerable last summer.
The second point that emerges from the right hon. Gentleman's narrative, though he was unwilling to identify it clearly, was that the European Community as a body failed completely to operate as its Governments had intended. Many of the promises made by European Prime Ministers as recently as October at the Summit Conference were not carried out. The Chancellor will be well aware that this point has been made by members of the Commission and by representatives of some of the countries not directly concerned in the discussions to which he has referred.
For most of us in this House the one agreed conclusion, although I am not sure that it is unanimously agreed, is that the reason Britain was not in the centre of the storm in the last few weeks was simply that the pound is floating. The advantages of floating have proved to be very real. It is essential that this country should be capable of enjoying these advantages, because we are particularly vulnerable to speculation—partly because we still operate 3 reserve currency and are a major international banking centre, but even more because of the disturbing trend of our balance of payments over the last year, involving a switch of £1,000 million in balance of payments over a year, and the fact that in the current year most observers expect us to have a deficit on balance of payments of between £500 million and £1,000 million. The figures over the last three months show an annual rate of deficit on balance of payments of £400 million.
I do mean the balance on current account. Indeed, these were the figures which led to a great deal of the decline in the value of sterling over the last few months. I shall come to that in a moment. The point I have just made. was made to the Chancellor by the Confederation of British Industry in its memorandum last November on the whole question of the floating of the currency and the pegging of the pound.
What the Chancellor failed to discuss in what he said was the importance of making it clear to British industry that he has no intention whatever of giving the pound a fixed parity until certain well-understood conditions have been fulfilled. He must know that the confidence of British industry in the prospect of continued growth is linked very directly indeed to its confidence that the Chancellor will continue to be guided by that famous sentence which he uttered in the Budget debate last year to the effect that he would not sacrifice growth to the maintenance of an unreal parity.
It seems to me that there would be general agreement on both sides of the House that there are three conditions which must be met before there can be any question of giving the pound a fixed parity again. We shall have to be able to satisfy the world, first, that we shall achieve a long-term equilibrium in our balance of payments; second, that inflation in Britain is, broadly, at least as well-controlled as it is in most of our trading partners; and, finally—and I shall return to this at the end of my remarks—that we have agreed some international machinery for the protection of parities against the type of speculative attack from which various currencies have suffered over the last two years.
Although I well understand the motives for the way the Chancellor has spoken, I cannot help feeling that it is dangerous to his basic responsibilities for the British economy that he should speak so often in ambiguous words, and indeed it appears sometimes in two voices. Whatever the reason, there is no doubt whatever that President Pompidou had the impression last September that there was a very good chance, indeed almost a commitment by the British Government, that the pound would be pegged before January, and in the Press conference which he gave just after January the bitterness with which he spoke about our failure to give the pound a fixed parity indicated again that he felt that he had been disappointed in an under- standing. I well appreciate that sometimes, even between the greatest statesmen, misunderstandings can arise, but I think that the sort of words that the Chancellor so often uses in referring to his intention to return to a fixed parity make this type of misunderstanding more likely.
Although I know that the contradiction between a return to a fixed parity and the pursuit of growth is part of conventional wisdom, is there not an underlying contradiction in this argument, because presumably the reason for which a return to a fixed parity would interfere with growth is that balance of payments restraints would be caused because of the pressure on the currency to go down? If, on the other hand, the currency is floating, it will presumably be floating downwards in such circumstances. But this would add to the pressures of domestic inflation, which would also presumably be an inhibition on domestic growth.
I do not think there is a contradiction and I shall address myself later on precisely to that point because it is of major importance—the contradiction between the sinking value of the pound in international terms and the maintenance of stable prices in the United Kingdom.
All I would say in defence of the Chancellor here is that if he had wanted to come down to the sort of fixed parity which he could have had some confidence of holding last June, there was no chance that the other members of the international monetary community would allow him to do so. Some of them would have gone down with him. It was only because he chose to float gently down that he was able to get as far down as he wanted, and only because he was capable of sinking in response to market pressures last week that the pound emerged comparatively unscathed from the monetary crisis which we are discussing. I think the hon. Member would agree with that.
If we could get international agreement to peg the pound at what we and the world monetary community regarded as a realistic parity for the long term, this would be better. But the question is, first, whether the international community would agree with us on what that parity should be and, secondly, whether the Chancellor, as a politician, could get away politically with the sort of parity which in his heart of hearts he regarded as sustainable. But I will come to the inflationary question in a moment.
I would suggest to the Chancellor that he has been trying to ride two horses—and I do not blame him—not only in talking repeatedly about returning to a fixed parity when circumstances permit, or as soon as possible, but in using the phrase "fixed but flexible parities". I think we need a good deal more emphasis on flexibility and a great deal less emphasis on fixture. Half the major currencies in the world are floating at the present time and many of the catastrophes which in the past some people have expected to follow from that have not so far occurred. I think he must be as impressed as I am by the fact that Mr. Gabriel Hauge, who is by no means an economic Bolshevik—he was President Eisenhower's economic adviser for eight years, I think, and is at present chairman of the Manufacturers Hanover Trust—was forced to say in London a couple of days ago,
I hope that the monetary authorities will take advantage of the time that has been bought to get at some of the fundamental questions, such as, how can a fixed parity currency system be maintained except with bands so broad as to make it virtually a floating system?
For my part—and I speak for myself—I am rather encouraged by the growing fashionableness of the right to float as a permanent element in our currency system until some of the other problems, to which I shall refer later, have been solved. It seems to me that there is no question but that we shall not be able to afford to return to a fixed parity at least during the rest of this year. The Chancellor made the point in his remarks a moment ago that the immediate effect of a devaluation of the currency is to worsen the trading balance, because the cost of imports rises immediately and the increase in the volume of exports takes one-and-a-half or two years to compensate for that. I think he was over-optimistic when he adjured the international community not to take too much notice of the fact that the situation got worse before it got better.
As he pointed out in his remarks this afternoon, the present currency crisis was largely brought on by the very large American deficit during 1972. Yet that was a deficit which everybody should have expected to follow in the 12 months immediately after the Smithsonian agreement. I suggest to him that both Britain and the United States will have much worse deficits in 1973 than would otherwise have been expected, and that unless the international community shows more sense than it showed a fortnight ago, those currencies may come under renewed attack if this proves to be the case.
I have spoken so far about the advantages for Britain in this situation of floating for some period. There is no doubt that they are real, and I think the great majority of hon. Members on both sides of the House agree on this. But, of course, there are also real disadvantages in floating when it means floating down, and the reason the Chancellor is floating now is that he expects to float down, at any rate for the immediate future.
We have floated down, 10 per cent. in the second half of last year and a further 2 per cent. on a weighted average of currencies since the turn of the year. Sinking, which is what this sort of floating is, is a defeat and it carries very serious disadvantages and dangers. I shall not indulge in the hysterical rhetoric which the right hon. Member for Bexley (Mr. Heath) used when the Labour Government devalued in 1967. One advantage of the events of the past few years is that a change in the parity for the worse is no longer regarded as a sin against the Holy Ghost. But, equally, a lowering of the parity carries very real disadvantages with it, and some action is required to correct or compensate for them.
One point which the Chancellor of the Exchequer did not refer to was the effect of the float on the sterling area, or what is left of it. When he talked to us last June he said that he intended the restriction on capital movement from Britain to the sterling area to be "strictly temporary". I hope that the Minister of State will tell us whether "temporary" means indefinite or whether he envisages a return to the previous freedom at least as early as a return to a fixed parity.
It would also be helpful if the Minister told us about the effect of recent currency movements on the Basle agreements. The compensation that we had to pay when we fell below a certain dollar parity we are now no longer obliged to pay. Do we get compensation for that? If we float again below the level fixed, do we start paying again? This is a matter of some importance to both sides of the House, and it is of some moral importance as well because we have real responsibilities of a moral and political nature which most of us have no wish to shrug off.
The other disadvantages of a float down do not lie, as was so often thought in the past, in the inconveniences to traders and banks in carrying on their businesses. There are inconveniences of which I have no doubt the Chancellor of the Exchequer has been made aware, but they seem to be inconveniences with which the City and the trading community can live if they wish to and, what is more, the trading community gets many real advantages from a float.
The real disadvantages flow from the immediate impact on the balance of payments and the inflation inside the country concerned. I come to the balance of payments point now. As the Chancellor of the Exchequer said, the immediate consequence of floating down is to worsen the balance of payments because the cost of imports rises and the volume of exports is slow to increase sufficiently to compensate for this.
Having attempted to study what has been written on these matters, I confess that it seems to me that it is not possible at this stage in the science of economics, if it is a science, to be very clear about the real impact on trading patterns of fairly small adjustments in the parity. One of the most obscure elements in the science of economics is to know how much real price elasticity there is in particular exports and imports to and from particular countries. Perhaps many of us on both sides of the House have been too confident that a gradual float down to a new level will produce the same sort of advantages in terms of the volume of exports and imports as a sudden drop. I wonder whether the psychological effect of a slow float down is quite as beneficial in the long run as that of a dramatic change. To that extent I share the belief of the hon. Member for South Angus (Mr. Bruce-Gardyne).
If we are failing to solve our internal problems and continue to float down, I agree strongly with the hon. Member for South Angus that the real worry is that the J-effect to which the Chancellor of the Exchequer referred may turn into a U-curve or even a double U-curve. In other words, the effect of speculation based on temporary deterioration in the trade figures may be to depress the value of the currency further so that we start paying for the next move down just as we should be getting the benefit of the first move down.
I do not ask the Chancellor of the Exchequer to make a prediction of the actual effect on the balance of payments of maintaining a 5 per cent. growth rate with a currency which is slightly further devalued than by last year's float. But there is a serious problem here especially because we cannot rely, surprisingly, on those who speculate in currencies taking the long view. There should have been no speculation against the American dollar on the basis of last year's trade figures. Everyone should have expected them to be bad. Everyone should expect them to be bad this year after the further 10 per cent. devaluation. Unfortunately that did not prove to be the case——
In the context of what the right hon. Gentleman said about a U-curve and a double U-curve, does he not agree that the same applies to the yen in converse? There is no guarantee that the revaluation of the yen will reduce the surplus. It may sharply increase it.
I agree with the hon. Gentleman, especially as we cannot be sure that the yen will float cleanly up to any new level and that the Japanese Government will not compensate for any up-valuation of the yen by the imposition of new non-tariff barriers to trade and the removal of some controls on exports. Certainly I take the view, not only for the hon. Gentleman's reason but for those others, that we are far from seeing a situation in which we can have confidence that the role of Japanese trade and currency in the international system will be more benign than over the past few years. I mention this point because it is too optimistic to assume that those who trade in currencies will be wise enough to wait until the effect of a change in the parity benefits the country which has made the change.
To return to the hon. Member for South Angus—I hate to pay him these continual compliments because we are not always so friendly to each other—the real and serious disadvantage of a devaluation or a float down is its immediate effect on inflation in the country concerned. I felt that the Chancellor of the Exchequer was less than candid about this. He never told the country, as he should have done, that the devaluation of 10 per cent. which the pound suffered in the second half of last year must already have produced an increase in the cost of living of between 2 and 3 per cent. I do not suppose that the right hon. Gentleman would dispute that this may he the fact.
Now we are facing a further devaluation against the weighted average of world currencies in terms of British trade of perhaps 1 per cent., according to the Chancellor of the Exchequer. He said that it would be little more than it was before the recent change in the currency parities. But most people think that it is about 2 per cent. However, there is no doubt that for the European countries in the Community which are now by far our largest trading partners, as the Government never weary of telling us, there has been a devaluation of between 5 and 6 per cent. I confess I prefer the figures given by the Minister of Agriculture, Fisheries and Food. Moreover, the shift in parities last week is likely to affect the price of oil which, because of the currency arrangements for determining its price in Europe, is likely to rise in Britain by about 6 per cent. as a result of the parity changes last week. Incidentally. I hope that if I am wrong about the 6 ner cent. estimate that I have seen, the Minister will reply to this point.
I should guess that the final effect of last week's currency changes, if they last for about a year, would be to add about 1 per cent. to the cost of living this year on top of all the other increases to which we can, if it is the right expression, look forward.
I noticed recently that the Daily Telegraph reckoned that the effect of the currency changes, plus the common agricultural policy this year and our contribution to the Community budget, would add about 3 per cent. in all to the cost of living this year. I dare say that for once the Daily Telegraph is being too unkind to the Government on this matter. Again, I hope that the Minister, who is certainly quick with all the relevant information, will give us his information later this evening.
We already know some of the things which will happen. We know that 5p is going on bacon in the summer and that there will be a 17 per cent. increase in the price of sugar, in both instances because of the removal of subsidies which have been paid until now. Butter is to rise in price. Steel prices are to rise perhaps as high as 19 per cent. or 20 per cent. Again, the Government have not given us an estimate, but we would like one. The effect of these matters on the Government's major strategy against inflation will be disastrous.
The Chancellor, in one of the few partisan passages in his speech, said that the real lesson of the currency crisis is that the trade unions should be good boys and that the Opposition should tell them to be good boys. However, the real lesson of the crisis is that if the cost of living is rising in ways that the Government cannot directly control, then they have a clear responsibility to try to limit increases in the cost of living where they have the power to do so.
We are still waiting for the Chancellor to answer the questions that I put to him last week when we had our first discussion about the crisis on what he intends to do to keep down the cost of living in this new situation. The Government must take direct action to keep it down where they are in a position to do so if they are to have the moral right or any political chance of an effective appeal to the trade unions and to ordinary working people for restraint in pressing for wage increases.
I do not want to run over the whole row of measures which we would like the Government to take, because we have debated them on many occasions. We are hoping that the Chancellor will take a few of them in his Budget in a fortnight. However, I will mention some of them. We think it is necessary, particularly in this new situation, for the Government to be prepared to subsidise some foods and to pay for those subsidies by withdrawing the tax concessions made in the last Budget to those living on unearned income or earned income of over £5,000 a year which are due to come into effect at the beginning of phase 2 regarding wages. We still think that the right hon. Gentleman must drop the rent increases of up to 50p which he told us only a few weeks ago he intends to bring forward next April.
We believe that the Chancellor must do something about land prices and housing. We were all tantalised by the Minister's answer to a Question this afternoon which suggested that some tremendous new policy for dealing with speculation in land is coming forward. We are absolutely fascinated by the suggestion that he made and by the brutality with which he rebuffed one of his hon. Friends who wanted to move him in the wrong direction. We shall expect the Chancellor to come forward with some really impressive measures which will clearly have an effect on the prices of both land and housing.
Again, the Chancellor must do something about the terrifying rise in rates which is likely to emerge from the current revaluation. The Treasurer of the Association of Municipal Councils has suggested that the rises could be as high as 141 per cent., and Sir Horace Cutler, not distinguished for his support of Opposition views, expressed the view yesterday that in the GLC generally the average increase would be 30 per cent.
If we do something in the international monetary sphere which has a negative effect on some of our policies in the domestic sphere, we have a clear responsibility to do other things in the domestic sphere to compensate for that. This is a debate on the consequences of the monetary crisis. As the hon. Member for South Angus pointed out—I call him to my aid again—a fall in the parity of the pound will increase inflation in Britain.
The Chancellor raised the question of trade union restraint. I suggest that I have your support, Mr. Deputy Speaker, in feeling that I am not only in order, but politically obligated to put the other side of that same question.
The right hon. Gentleman referred to something that I said about the effect on the economy, and so on. As a matter of record, I was referring to international monetary reform. He also talked about the effect of devaluation—I think that was the word he used—since the crisis. He may have his opinion and disagree with our assessment in the Treasury, but, speaking as Chancellor of the Exchequer, the best estimate that I can make is that there should be little impact on the total of our trade or on the cost of our imports. We may lose in some markets, but we shall gain in others. However, taken together these effects should broadly balance out. Therefore, if the right hon. Gentleman wishes to talk about a fall in the value of the pound since that crisis, it must be on his responsibility. I do not agree with him.
The Chancellor suggested that there had been a fall of 4 per cent. in the value of the pound since immediately before the resolution of the crisis—we shall have to look up the figures in the hour before the crisis was resolved to see what his base line was—vis-â-vis the totality of Common Market currencies.
The Minister of Agriculture, Fisheries and Food—I quoted his words before and I will quote them again—said,
What has happened now is a reduction which will approximate somewhere between 5 per cent. and 6 per cent. as a further depreciation of the pound in relation to European currencies."—[0mciAL REPORT, 21st February 1973; Vol. 851, c. 477.]
The Chancellor may reject his right hon. Friend's view as not worthy of consideration by the House, but I have more respect for the present Minister of Agriculture, Fisheries and Food in his economic rôle than for some other right hon. and hon. Gentlemen who assume similar pretensions.
This is an important point. If the right hon. Gentleman wishes to concentrate on only one aspect, all right, let him do it, but that is not what matters. What matters is the effective sterling exchange rate. I have given him our conclusion on that. I hope that he will accept it and not go out of his way to draw other conclusions which are more disadvantageous to this country and do not stand up.
The right hon. Gentleman knows that he was responsible, in the second half of last year, for a fall of 10 per cent. in the value of the pound against other world currencies. He knows that there has been a further fall against European currencies, he says, of 4 per cent. The Minister of Agriculture, Fisheries and Food, I presume on Treasury advice, said that the fall was between 5 per cent. and 6 per cent. If the right hon. Gentleman is maintaining that we shall gain more in American markets than we lose in the area of the world which he has repeatedly told us is now by far the most important to us in our trade, I suggest that he is contradicting many remarks that he has made in the past. I stick to what I have said in the terms in which I stated it.
I know that the Chancellor of the Exchequer does not like points being made, but I quote Government figures and ministerial estimates. If we add together all the increases in the cost of living resulting from changes in the parity, resulting from Government policies which they are still free to change but refuse to change, and resulting from increases in world food and commodity prices, millions of ordinary working people in this country will be worse off if the Chancellor's guidelines for prices and incomes are accepted.
The serious point I put to the Chancellor, and I hope he can persuade his hon. Friend to answer it, is this: does he not feel that in this situation, in which the real living standard of many people in this country will otherwise fall, he should go back to the suggestion for a threshold agreement on wages which the Government themselves made last September? I warn him that unless he is prepared by some such agreement to protect particularly the lower paid workers against the inflationary consequences of his other policies—and also, I readily agree, of international factors over which he has no direct control—he has no chance whatever of making his policy work.
I have given way a good deal and have perhaps been led off my track too much particularly by the hon. Member for South Angus.
I now want to return to the international aspects of the crisis. I hope the Chancellor finds what I have to say on the international aspects of the crisis as agreeeable as, clearly he found what I had to say on the national effects of the prices.
Surely the big lesson of the crisis in the international sphere is that many aspects of the communities' approach to international trade and monetary problems are based on fantasies which bear no relation whatever to the real world.
Take the European Monetary Union. I was absolutely staggered that the Chancellor again this afternoon, and apparently at a meeting of the nine Finance Ministers in Brussels a few days ago, reasserted the Government's commitments to bring about a complete European Monetary Union within less than seven years from now. He knows to what he is committing himself. Let me remind him of the statement made by the Community Ministers to define the Union as it should exist, and as he has recommitted himself to create it, by 1980. First, they must form
an individualised monetary grouping within the international system, characterised by the total and irreversible convertibility of currencies, the elimination of the margins of fluctuation of exchange rates and the definitive fixing of foreign exchange parities, all of which are essential conditions for the creation of a single currency.
This has to be done before 1980.
To take another objective to which he has commited himself,
the margins within which the essential elements of the public budgets as a whole must be contained, and in particular the changes in
their volume, the size of their balances and the methods of financing and employing the latter
—in other words, the whole of his economic management policy, the whole of his taxation strategy—
shall be determined not at national level but at community level.
It is fantasy, and dangerous fantasy at that, in the face of what has happened in the last two years to pretend that anything like that is possible within seven years from now.
The plain fact is, if Japan is left out of the reckoning, that sterling has shifted in its value more against the major European currencies than it has against the dollar. The deutschemark, for example, is worth 56 per cent. more than it was worth in terms of sterling six years ago.
It is ludicrous to pretend, if the Chancellor intends, as he clearly does, to retain any national responsibility for growth in Britain or for the pattern of British trade, that there can be agreement to create a single currency or restrict even the margins of fluctuation vis-a-vis the European currencies and still achieve his other economic objectives.
The only thing we can all hope is that he does not believe a word of it himself and that the Prime Minister does not believe it either. We were all heartened, I think, to see the words the Prime Minister used the other day while talking to the American Chamber of Commerce when he insisted on the right of individual adjustments as well as collective adjustments and of the right of Governments to protect growth.
The real difficulty is that so long as he and his fellow Finance Ministers continue to pretend they are committed to this quite unrealistic objective, they are liable to accept measures as steps towards that objective which have no justification, indeed, are totally dangerous and damaging to their interests, except in the context of that objective. The snake in the tunnel agreement which the Prime Minister agreed to violate within six weeks of having become a party to it was a very good example.
I hope, when he and the Prime Minister talk to Mr. Ortoli in the next two days on these questions, that even if he is not prepared to say what he thinks in public, he will say it in private so that there is no longer any misunderstanding.
If the European Monetary Union is a nonsense, then the whole basis of the common agricultural policy collapses. Indeed, Mr. Pompidou pointed out in his Press conference on 22nd September that floating exchange rates meant the death—that was the word he used—of the agricultural common market. He is, of course. right, and we learnt this week that in order to preserve the phantasm of a common agricultural policy and single prices we now have 56 different compensatory amounts in existence to level out agricultural prices within the European Common Market. I am not surprised that the agriculture Ministers decided to give themselves a rest for a month or two before they get to grips again with this problem.
I put this to the Chancellor because he is responsible for protecting Britain's national economic interests in these negotiations. There might have been a case for the common agricultural policy in the middle fifties as a means for compensating France for the damage she then said she expected to encounter in her industrial trade as a result of joining the Common market, though in fact she suffered no damage, but in the middle 70s there is no excuse whatever.
Mr. Giscard d'Estaing was kind enough to tell us only two days ago that by 1980 "the French GNP per head"—whatever he meant by that, and I suppose it was GNP divided by the number of people in the country—would be nearly twice the British GNP. Yet Mr. Giscard d'Estaing continues to insist on agricultural arrangements which would require Britain, according to the Government's own estimates during the negotiations, to pay France across the exchanges £469 million in 1980. This is in addition to the advantages the Government are giving France by surrendering the biggest food market in the world at the cost of Commonwealth producers, compelling the housewife to renounce her right to cheaper food when that is available from outside the Common Market.
One aspect which puzzles us on this side of the House and, I dare say, many people in the country also, about the Prime Minister is that he was a few years ago a dedicated believer in the principles of the market economy and the laws of supply and demand. We all understand that. He explained it, and he tried to act along those lines when lie took office here. But now he has seen the light, he has been on the road to Damascus. He has now abandoned his faith in the market economy and he is attempting to intervene more directly and more comprehensively in the operation of free enterprise in Britain, I must confess, than any Government I can recall since the war. But if he thinks the principles of the Market are a nonsense for Britain, why does he continue to support those principles as applied to European economic co-operation? That surely is a total nonsense.
We hope that the Prime Minister will find, and communicate to his Chancellor of Exchequer, the same belated realism in his approach to European problems as he started to show in his approach to some of the national problems.
It is only if we base European attitudes in monetary co-operation and agriculture on realism that we have any chance of making progress in the wider international sphere to which the Chancellor referred at the end of his opening remarks.
On the wider international problem, the one fact that last week's crisis has demonstrated beyond belief is the immense bargaining power of the United States in these matters. It has proved that it is possible to devalue the dollar—something which many people believed, for intellectual reasons, was literally impossible, as recently as 1971. It can change its parity with comparatively little effect on its internal prices, because it is so little dependent on foreign trade, compared, for example, with Britain, and already it has inflation far better under control than most of its interlocutors, although there are some signs that, in phase 3 in the United States, inflation is growing very rapidly there too.
But above all, its main international interlocutors, Europe and Japan, both need, and say they need, American security and guarantees in the military field. Finally, even if the President wants to, Congress may prevent him from adopting as liberal an approach to these questions as the rest of us would wish, particularly if his devaluation greatly increases this year's deficit in the United States payment. Even before the recent crisis, it was estimated that they would show a deficit of some 5,000 million dollars.
The one thing that the Americans have made absolutely clear—it would be folly to ignore this—is that they are not prepared to settle a new long-term monetary arrangement for the world unless, simultaneously, they get a new long-term trading arrangement for the world. As the Chancellor pointed out, monetary changes can have even more effect on the flow of trade than tariffs or tariff changes. Indeed, the fact that the deutschemark has appreciated against the pound sterling by 56 per cent. in the last six years has had far more effect on our mutual trade than any changes in tariff barriers which may come about as a result of our joining the Common Market.
There is no question that, for the American Administration and the Congress, the main target in international trading at the moment is the Common Market's common agricultural policy—which should be our main target as well. What I suggest to the Chancellor is that, if he finds it impossible to persuade his Common Market partners to adopt a procedure in the forthcoming trade and monetary negotiations which is compatible with any chance of success in those negotiations, he would do far better in those fields to ally himself with the United States than with European countries.
There is no time to run over the major issues, which, as the Chancellor said, are highly technical as well as highly political. I think that we would all support—certainly I would—the general position that he put forward in September 1971, particularly in regard to replacing the present reserve currencies by SDRs, although we are rather disappointed that he has not followed up those general propositions with any more detailed statement on the matter, such as Mr. Schultz made—he referred to it at the IMF meeting last September.
I think that the right hon. Gentleman is as keen as we are to try to develop some agreement or machinery—it could be one or the other—to prevent the footloose Euro-currencies and the funds of the multi-national companies from wrecking parities and international currency agreements—whether such an agreement is sought through the licensing of floating when a currency is under attack or through the setting up of some machinery for imposing some sort of negative interest, for example, on such funds when they move from one country to another.
The lesson of last week's events is that it would be dangerous to agree on new rules about parity changes until agreement had already been reached on the reserve currency problem, on problems of liquidity and on the question of capital movements and shifts of funds which wreck the international economy.
The right hon. Gentleman talked about adopting objective indicators, but I should be grateful if the Minister of State, when he replies, could answer the question that is worrying more and more of us. Once one fixes objective indicators, after which there must be an automatic adjustment of currencies because reserves are either rising or falling, how can one prevent those indicators from becoming widely known? And, once they are widely known, how can one prevent people from speculating on a change in the parity?
People are on a one-way bet once there has been agreement on objective indicators and criteria for parity changes. The moment these indicators appear, they start speculating. Then, of course, they force the adjustment long before it need have taken place, and make a big killing in the process.
The one thing which does emerge, however, is that, on these major issues of trade and currency, there is no chance of finding solutions on a European or Community scale alone. The idea that, faced with footloose Euro-currencies totalling some 100 billion dollars, a European monetary fund could protect the mutual parities between European currencies with a total of, say—I do not know what it will be—10 billion dollars, I suppose, at the absolute outside, has only to be stated to be dismissed.
We must all agree—I believe that the Chancellor accepted this—that the resolution of last week's crisis was not a permanent settlement, or even more than a very temporary settlement, of the currency malaise from which the world has been suffering in the last 10 years or so. But at least the resolution of that crisis gives us time, time which I am sorry to say—I think the Chancellor implied that he agreed with me—we wasted dreadfully after the Smithsonian Agreement. Little progress was made on these questions last year in the Committee of Twenty or, preceding that, in the Committee of Ten. But we have time now.
We have been warned that there are dangers and disadvantages, particularly in Britain, in some of the consequences and implications of last week's agreements. But there is one great benefit to us, to Europe and to the world. The events of last week have exploded certain myths which blocked a realistic approach by the European Governments and peoples to a resolution of these more than European problems. I hope the Chancellor and the Government will now have the courage to use these new insights into the situation to lead their partners in Europe and in the world towards a more realistic attack on the central issues.
One of the problems of debating this subject is that it is very difficult to be adequately brief. For that reason, I will not follow the right hon. Member for Leeds, East (Mr. Healey) into his Budget preview, fascinating though it was. The other problem of this subject is the jargon and the way that it changes. In my day, it was "rallonges" and "gold plus green stamps". Now it is "snakes in the tunnel" and "dirty floating". The jargon changes so much that is confuses us and also means that we do not recognise how profound are the changes which have been taking place in the problem itself in the last decade.
It is for this reason that I would like principally to warn any who are hoping for an early and definitive settlement of the world monetary problem that they will be disappointed. They will get the dusty answer reserved for those who are hot for certainty in this life, because this is a problem which shifts, and will go on shifting far too rapidly.
The international monetary system is the servant of world trade and investment and as the patterns of world trade and investment change, so will the monetary patterns change. Differing growth rates between countries and indeed within countries at different times will give rise to the need for constant change and flexibility.
One of the fascinations of this subject, which is nothing like as dry as some people who do not come to these debates think it is, is that it embraces not only statistics on economics but also the most violent politics and some very deep human instincts. Look at the way in which the adjustment of parities as an economic process has been bedevilled in country after country by purely political considerations. Look at the way in which the problem of the American deficit has been used for political purposes and consider the monetary aggression of France under de Gaulle against the American economy.
Then let us not forget the extraordinary fascination that gold has for men and how this strange metal can produce a sort of frosty smile even in the coldest heart of a gnome of Zurich. All these strange irrationalities, political or mystical almost, bedevil any purely analytical solution of the international monetary problem. Therefore, we are very wrong if we think that any early and definitive solution can be hoped for.
The recent settlement was very good. The results, so far as the yen is concerned, and the European currencies and the dollar, have been as good as possibly could have been negotiated. I do not accept that the effect on our import prices will be what the right hon. Gentleman has said. I believe that the Chancellor is absolutely right. We should concentrate mainly on the price of commodities which we have to import because there is no domestic competitive substitute. When one looks at that and at the flexibility of the commodity markets of the world and the different currencies, one should be very surprised, as I would, if the overall price level in sterling terms of commodity imports changes to any appreciable extent as a result of this settlement.
It is not fair, either, to say that the Americans have got what they wanted, though indeed they did. I have seen it said in distinguished newspapers that this came about because of American political power. But surely the point is that it is in the interests of the world as a whole that the Americans should get their objectives. If they did not get what they wanted at the Smithsonian talks, perhaps, looking back on it, it is a pity.
I entirely agree about this. It is a tragedy that Smithsonian went off, as it did, at half cock. My point concerned the forthcoming negotiations on trade and currency where there is a disposition in Europe to regard American demands for linking trade and currency together, for example, as totally unreasonable. The American position is a very rational one, particularly for the United States in their circumstances.
I agree. The right hon. Gentleman seemed to be suggesting that in the recent negotiations the Americans had got away with too much. I am happy that he was not saying that. The other lesson of the recent so-called crisis is that it was not really a crisis on the scale people believed. The system stood up to the problem far better than many expected. Some of the rather gloomy predictions about world depression and recession never came to pass. The main people whom one should console are the Germans, who lost about 600 million dollars in supporting the dollar—a good deal less than Britain lost in supporting sterling in 1967, but I shall not go into that.
One must feel sympathy for the Germans for, after all, they are not running a large balance-of-payments surplus. Indeed, their invisible deficit, I understand cancels out their total trade surplus. But I believe that this particular crisis did not really exist. It was an urgent situation calling for urgent readjustments of parities, and these adjustments were brought about and have proved that the old Bretton Woods system still, by and large, was not such a bad one as is sometimes said.
The nature of the problem has changed very much since Bretton Woods. Then, people were obsessed with the possible dominance of the dollar in world markets, obsessed with trade discrimination and with the possibilities of competitive devaluation. Certainly the problems have changed since then. However, two or three things were not foreseen. First, as I have said, the political resistance to parity adjustments has really prevented the sort of flexibility that the Bretton Woods system was designed to provide for the world. Secondly, I do not think that anyone foresaw then the emergence of the dollar deficit as the greatest problem of the international monetary scene. This deficit has been and remains both a blessing and a curse.
Without the American deficit the financing of the expansion of world trade over the last 10 years would have been totally impossible. Gold could not have carried it. It is a barbarous process to try to rest the international supply of purchasing power on the accident of the rate of production of a particular mineral in certain parts of the world. The reserve currencies could not carry it all, for they are domestic as well as international currencies. One man's reserve is another man's debt. Therefore, there is a clear limit to the extent to which reserve currencies can carry the strain.
The American deficit has been the cause of much international friction, both political and monetary—the continued French resistance and objection to its existence, the continued and often justified criticism that American industry was able to finance its own investment in Europe on the basis of cheap European funds, and the long and persistent argument between the soft money men and the hard money men. The soft money men argued that the problem in international liquidity was to provide adequate liquidity to ensure that the growth of trade continued. The argument of the hard money men being that if one had too much liquidity one promoted world inflation and world rising prices.
This argument has continued for many years. On the whole, the European Community countries tended to be the hard money men, whereas we, the Americans and the Scandinavians, and I think the Japanese, tended to be the soft money men. It has been a policy of succeeding British Governments to try to find other international reserve assets which could take the burden of gold, sterling and dollars. Certainly in 1962 we advanced a proposal for a Mutual Currency Fund. It did not go with a swing at the time, but a year or two later it provided the foundation for the SDR negotiations. Since then, the position of the dollar has been eased by a series of devices starting with Roosa bonds, moving through non-convertibility, leading to the new discovery that the dollar can be devalued.
The importance of this latest discovery is that it means that in future the dollar, like other reserve currency, can be a currency in the true sense and can adjust to the requirements of the international monetary situation with the benefit not only to America but also to her trading partners.
The other great change in the whole picture has been the growth of capital movements. It is astonishing how the funds have grown. I remember that when I was Chancellor of the Exchequer if about £20 million moved out of the reserves in a day we started to worry quite a lot. Now it is 10 or 20 times that amount—I do not know the exact figures. But movements over the last three or four years have been very much greater than they were 10 years ago. There has been an enormous growth of the Euro-currency market. While it might be reduced by United States abolition of the interest equalisation tax, it will continue to be a very large source of funds indeed, and it will be joined by the possibly enormous sums of currencies that will accumulate to the oil-producing countries of the Middle East over the next 10 years. This is one of the biggest problems which will have to be tackled in any change in the modern monetary pattern.
The right hon. Gentleman kept referring to speculative movements of funds. This is a misleading word. The fact is that these large Euro-currency funds and other balances are held by people in particular currencies, and if they think that a currency is softening and weakening it is a matter of simple prudence to move them somewhere else. That cannot be described as speculative any more than the leads and lags which affect current balances. These are inevitably problems which will continue as long as people have large international funds. What we need are new techniques for the adjustment process, and I should like to suggest one or two.
The first is a continued and even clearer recognition of the mutual responsibility of creditor and debtor countries. The recent agreement underlined that very well, and it must be continued. Secondly, I do not believe that a floating system is the cure to the sort of movements we have had recently, because the sort of movements one gets when capital flows across the exchanges are very artificial and so totally out of line with any trade movement that any movement of the currency which would deal with one's capital movements problem is bound to distort world trade. No floating system will deal with this problem. I have often tried to make up my mind about exactly what the right answer is on the principle of floating currencies.
My right hon. Friend cannot ignore the fact that in this very recent crisis there was no great movement into or out of this country, because with our currency floating it was able to be at such a rate that it really was not worth speculating against. Is not that some evidence that floating stops these large capital movements destroying one's position?
I do not think that that was so. One looks at the relative position of the deutschemark and the yen, the two currencies most likely to move upwards. The yen was very little affected because of their exchange control, but the deutschemark was very much affected, because their exchange control was left wide open. Surely it is not so much the rate as the possibility of future movement and the question of the extent to which funds can actually move.
The reason that sterling was on the sidelines recently was that current valuation of sterling on a float basis was generally expected to remain about the same, and by and large this has been borne out by the recent negotiation. It was, of course, the policy not only of the British Government but of virtually the whole sterling area and the Commonwealth in the early 1950's during the period called the collective approach to convertibility. They all were committed to a floating rate and we were driven off it in 1955 at the meeting of the Bank & Fund in Turkey where the pressure of world banking opinion forced us to pin ourselves to the mast of a fixed rate. Whether that was right or wrong it was inevitable.
Since then, however, I have come more to believe that while there cannot be a theoretical float in the sense that no Government can totally ignore the valuation of its currency, all governments and monetary authorities will always, to some extent, control the current value of their currencies.
In spite of the fact that there cannot be a completely free float, there are, however, obviously advantages more often than there were in the technique of floating from time to time in particular circumstances, and specially where time is needed either to get currency adjustment more properly capable of judgment, or in order to get changes in the actual monetary system. I am sure the float has come to stay more often than it did, but I am equally sure that floating in itself is not the answer to the long-term international monetary problems.
What we shall see, I believe, is an extension of the two-tier system. The situation arises where the changes of parity required to meet a capital situation are totally different from the change required to meet a current situation and the recent position of the deutschemark is an obvious example of this. The logic of this appears to be that over the years there will be more and more examples of the two-tier system possibly becoming institutionalised on a worldwide basis.
The only other point I want to make is about Europe. Without in any way wanting to go back on the concept of European monetary union, I think that it is right to think again very realistically 'about its timing. The Chancellor knows that I have always been sceptical about the timing envisaged, certainly in Europe, about the move to monetary union and a common currency. I have always been surprised that the French, with their particular political and logical outlook, should attach so much importance to monetary union. I suspect that this is something to do with the fact that the words "union" and "unity" have slightly different meanings in English and French. I am sure that we have always been slightly at loggerheads about this.
The European payments Union, as we had before convertibility, was effective and viable machinery but I cannot help thinking that a single common currency should conic at the last stage in the development of an economic entity and not at the early stages, and it would be a mistake to try to push its growth ahead too fast, rather than let it grow naturally. A common currency means common reserves, a common policy, a common institution to supervise that policy and a common parliamentary set-up to supervise, again in democratic terms, this institution. That is what is meant by a common currency, and while it should remain an ultimate objective of our European policy we might be wise to survey the timing once again with our colleagues and see whether we are not in danger possibly of being diverted a little from the basic international problems of monetary matters into too much consideration for the European ones. I put this forward with diffidence because the Chancellor will remember that we have talked about this in the past.
To sum up, we shall not get an early and complete answer to these problems but we have considerable grounds for being satisfied with the resilience of the present system and with the details of the recently negotiated settlement.
The right hon. Member for Barnet (Mr. Maudling) pointed out two of the factors in the present crisis which led up to it. In particular he outlined the monetary pattern which depends on the trade pattern and he pointed out, too, that money moves around rather more easily today than it used to.
I believe that monetary crises will become rather more common in the future than they have been in the past for these main reasons. Not only is money capable of moving around quickly but trade, as a proportion of the gross national product of all trading countries, has increased at an enormous rate. There has been a virtual explosion of world trade in the last decade. The 1963 figures show that world exports amounted to 136 billion dollars, but by 1972 they were at a level of 369 billion dollars, almost trebling in those nine years. That means that leads and lags very much increased. Coupled to that, of course, was the increasing role played by the multinational companies. Having the ability to manipulate these large increases in trade and the funds that derive from them, they were thus able to shift some of the results of this trade across exchanges in a way which was obviously not disadvantageous to them.
I would agree with the right hon. Member and not call that speculation. It is not unreasonable to expect a person selling to Germany not to rush a German customer into paying him too quickly. And in the case of a British importer it would not be unreasonable for him to pay his bills more promptly than usual. I do not call that speculation. I call it an obvious consequence of a currency not being at the rate that those traders concerned expected it to be for any length of time. Many barriers have been suggested against the flow of funds that we have seen recently. I am very sceptical about how further artificial barriers, could be erected in any way that could cut out any anticipation of the movement of capital. One thing that is important is that these currency crises operate against the advantage of traders and in so far as they pose a danger to increasing world trade they are much more serious than might otherwise be the case. It is a question not of trying to cut down the flow of funds but of trying to maintain and extend the flow of trade.
I suppose that I should here pin my colours to the mast as other people will need to do. I am in favour of fixed parities; I believe that their enormous advantages are still with us. The way in which international trade is coming to be an extension of the home-based trade is one such important development. Things were different in pre-war years when shipments used to be made on the basis of individual consignments, very frequently against letters of credit, whereby guarantees could be obtained by those traders concerned. If there were any foreign exchange risk there was always the possibility of hedging in the forward market. But that was how trade used to be conducted. Now it is very much more a continuous process similar to trade on the home market with regular monthly deliveries maintaining high levels of supplies. In such a situation, it becomes much harder to initiate a completely satisfactory way of protecting either the exporter in this country or the customer overseas. Faced with the present kind of crisis, manufacturers and customers take the only steps open to them, by widening their profit margins to allow for problems. That in itself is a further barrier to trade.
Pricing under a floating rate presents other problems of a different kind. The manufacturer, who is not always a large organisation, is asked to take a view of future parities. The lack of facilities for hedging in the forward market makes it even more hazardous.
I accept, as the right hon. Member for Barnet accepted, the need to float from time to time in a difficult situation when the temperature of the market must be tested. The best test is obviously a clean float to see whether the ideas of the parity are approximately in line with those of outside opinion.
But there is one exception to my support for fixed parities. Although I am in favour of them generally, in the present state of uncertainty, if we are to face devaluations and revaluations of the frequency that we now see, any advantages from a fixed parity disappear and we might as well float. But I very much hope that at the end of the day we shall find ourselves in a situation in which differences between inflation rates and productivity rates in different countries are not quite so large as they have been in the past, and will permit a much greater degree of comparison and so enable fixed rates to return.
Japan was fundamentally the reason for the present crisis, because it has been in a position of enormous industrial advantage, being allowed by other industrialised countries to build up its own industry to a size that has increased year by year and poses threats to other countries. The situation has been brought about by Japans' attitude not only in world currency operations but in her own industrial policies. Eventually a warning will have to go to Japan that it cannot be permitted to continue to build up its industry indefinitely at the expense of those countries to which it expects to export ever-increasing quantities.
Those who look at the floating arrangements being carried out in Japan cannot deny that it looks very unlike a clean float, which we might have expected to be a condition demanded by those who met to settle the currency crisis. As my right hon. Friend the Member for Leeds, East (Mr. Healey) pointed out, the revaluation of the yen is likely to be offset by the ending of the rather doubtful controls that were supposed to limit its exports.
The fundamental advantage that Japan has had over the years has been its under-valued currency, which it has been able to maintain year after year. It enabled it to build up Japanese industry, particularly in electronics, optics and motor vehicles. Electronics and optics are the very industries that will play a crucial rôle towards the end of the century. Japan's advantage in its preeminence in precisely those industries cannot be allowed to continue indefinitely at the expense of our comparable industries.
I look at the situation of Japan with some envy. I partly wish that we had done some of the things that Japan has done, but I should never have expected our country to do them as ruthlessly, with the setting-up of MITI and the Government's control of industry and the operation of the yen. Their fierce control of imports and savage restriction of any kind of foreign investment which they felt might harm their industry has enabled the Japanese, and is continuing to enable them, to enjoy a level of increases in production which is rightly the envy of the world. But the rest of the world is having to pay for the advantages that Japan enjoys.
We shall have to act in concert with other countries to bring some of Japan's special advantages to an end. I have never been in any doubt about the advantage to an industrial country of having an under-valued currency. I had assumed that the Chancellor of the Exchequer had come round to that point of view. I thought that his statement in last year's Budget speech implied an acceptance that within reasonable limits an under-valued currency was something he hoped to achieve to benefit our industry and enable it to export. But his comments today surprised me.
My right hon. Friend the Member for Leeds, East immediately took up the Chancellor's statement that industrial unions could make no greater service than not to weaken sterling in a way which would lead to a devaluation. That statement can be considered in a number of ways, but one of them means that we are back in the old treadmill of trying to maintain the parity of the pound and treat it as a symbol. I thought that that had ended some years ago, when we used to talk about devaluation leading to a reduction in the standard of living, and meaning that we were selling our goods too cheaply. We looked only at that one, narrow aspect.
If used properly, devaluation enables us to establish wider markets for industrial products. With wider markets, we make more goods more cheaply and more efficiently. The devaluation that I favour is not the gentle floating downward kind but a purposive devaluation which has as its intention not to accept a rate that other countries think right but to set a rate that will provide advantages for our industry. In the past few years there has been a whole series of missed opportunities, not excepting the present floating downwards. Such a devaluation policy as I have described, which need not be shouted from the housetops—I should not be referring to it in quite this way if I thought it were a policy that the Chancellor might come to accept—would be the greatest argument of all for some sort of incomes agreement.
The tragedy of the past is that we have always tried to get an agreement on incomes at the wrong time. In 1966, we tried to get one as as substitute for devaluation. It proved disastrous because if one finds that one's inflation is reduced as a result of such a policy by 1 per cent. a year, it takes 14 years to make up for the alternative of devaluation. The present Government's incomes policy is one of last resort, taken because everything else had failed. They are trying to slow down the rate of inflation by means of it. But if instead we used incomes policy in the period immediately following a purposive devaluation, we could—I put it no higher—get industrial expansion at a time when import prices rise and get the kind of take-off which has always eluded us.
The first decision to be taken is whether the Government want an undervalued currency. Once we know that, we can decide on the means of achieving it. The situation which used to exist, in which countries were proud of the high standing of their currency, has been slightly altered. There is a possibility, which did not exist to the same extent before, of competitive devaluations. Other countries are likely to wish to have their currencies undervalued as well. But one may well find that there are no longer so many obliging countries prepared for a high valuation of their currency, as we were not so long ago. Therefore, the first step must be to decide whether we want an undervalued currency. If we do, we have to decide how to go about it. Once we do that, with agreement from the United Nations as to how it should be put into effect, we have a chance of getting the kind of industrial expansion which would come from the resulting increases in the markets.
What is probably valuable in the world is not a greatly undervalued currency, as the yen is even now. What is valuable is a moderate undervaluation of our currency which may produce an expansion of our exports relative to the expansion of exports of other countries. If we could achieve this, we could help the modernisation and development of our industry, which should be the prime economic objective of the country.
It may be irrelevant and even irreverent, but it always surprises me, when I think back, that when the present Government came into office we had a fixed parity and fixed interest rates, and floating wages and floating prices. Now, two and a half years later, we have a floating parity and floating interest rates, and fixed wages and fixed prices. I think that the hon. Member for Ashton-under-Lyne (Mr. Sheldon) was correct in identifying himself both with fixed wages and prices and with fixed parities. If one takes the view that one should control the indicators—the prices—of these vital commodities in our economy, he has come to a consistent conclusion. I believe that it is better to let all these indicators find their own price in the market, and that is why I am not happy to fix any of the four—prices, wages, interest rates or currency.
The factors, in my opinion, which go to make up the price of a currency on any day are highly complex and very difficult to disentangle. It is obvious that a major factor is the rate of inflation of the country. Another is its trade performance. Another is its economic growth and productivity. That is not all. There is the expectation of the purchasers and sellers of the currency as to how these factors will develop, which also determines the price at which they are prepared to buy and sell the currency concerned. It is my humble opinion that the expectation of the rate of inflation of a currency may well be the most important of the factors which determine the price at which any currency floats—always, of course, provided the float is reasonably clean.
It is interesting, therefore, to see how it is that we could deal with these problems not only of the realities of economic performance but of the expectations of them. One sees that the Common Market countries recently have attempted to control inflation through the operation of their deficits, by reducing or increasing the deficits or by putting taxes up, as Germany has done. Indeed, monetary policy is probably the greatest determinant of the rate of inflation. So the whole thing ties up.
With a properly controlled economy, the rate of inflation can be reduced. I believe that so long as we have economies which are inflating at differential rates because they have different policies—money supply, deficit financing and so on—we are bound to get strains between countries with different rates of inflation.
The system of fixing their parities—the one in relation to the other—is always bound to come to grief if there is a significant movement in the expectations of the rate of inflation of each of the currencies. It does not help very much to set bands between which a currency can move up or down because the moment that currency is seen to be approaching the top or the bottom of the bands it attracts speculators, as they have been wrongly called—those who are fearsome of losing the value of their assets. They are bound to think of moving their money the moment they see the value of the currency getting closer to the limits at which it will be maintained. The trouble with the snake in the tunnel is that when the snake begins to touch the top or the bottom it sets off extensive movements in hot money which in the end has to break the tunnel. This is why I do not see that fixed exchange rates can ever guard us against flows of hot capital. In my opinion, they cause them.
This applies, as my right hon. Friend the Chancellor of the Exchequer said, to the two-tier system, because all one is doing there is fixing not only one rate for domestic and ordinary trading purposes but another rate for the exchange of capital, particularly short-term capital. One is more likely to make a mistake in trying to fix two rates than one is in trying to fix only one rate.
It is apparent that floating is becoming more and more fashionable. I was delighted to hear the right hon. Member for Leeds, East (Mr. Healey), in one of the most encouraging speeches I have heard him make for a long time, coming close to accepting that proposal. My right hon. Friends have floated successfully for seven or eight months without any apparent damage. Other countries have floated from time to time, such as Canada and Japan—although it is a little early to say how clean that float has been—and Italy. These countries have noticed that the great speculative flows have passed them by.
It seems that we could be a little bolder in our support of floating currencies. There are protestations on all sides that we intend to fix again. It is rather like the 10 green bottles, hanging on the wall. Every year another bottle accidentally falls. Once it has fallen it never seems to be possible to put it back on the wall, and I for one am delighted that that should be so.
We have to deal with the disadvantages of floating which are often canvassed. The first one has now melted away. The first oft-quoted disadvantage was that it meant that businessmen could not estimate ahead what they would have to pay. Admittedly our forward foreign exchange markets will have to adapt to dealing with that but I was once a businessman and I used to build factories and heavy engineering structures. I never knew two years ahead what the price of cement, building labour or plant hire would be.
There are all these uncertainties in industry. This is what contracting is; it is making the best guess possible about the future price of the ingredients of the tender. To add one more ingredient to a long list in any tender does not seem to be asking too much of human nature. I believe it is now generally accepted that this was more in the nature of an argument of bankers by which they could make certain profits without having to take much risk rather than a genuine objection to floating
The second disadvantage, which my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) stresses, is that floating rates give no discipline to a Government to maintain the value of their currency. If we can gently float down through over-inflating, through deficit financing, through what my right hon. Friend the Member for Barnet (Mr. Maudling) called soft money policies, it is said that there is no reason why we should ever stop. There is no crisis to bring us up sharp. This is true. If we had had a fixed pound for the last seven months we would certainly have had a balance of payments crisis by now. If we had remained fixed after the June crisis we would have been under pressure already because we are deliberately inflating the value of cur currency.
The Chancellor said in his Budget that he would do a little reflating. So we reflate, inflate, and the value of our currency goes down. But it has never been obvious to me, looking at our recent economic history, that the fact that we had fixer parities until last June resulted in a great discipline upon British Governments. It is not as if they are prepared to achieve a great deal in terms of discipline. It also resulted in the phenomenon of "stop-go" which was universally unpopular because when the balance of payments started to go wrong it had to be "stop". This was bad for business. Certainly the long-drawn-out battle for the parity of the pound which the Labour Party had to fight resulted in much more loss than gain. I do not know whether discipline should not start earlier if we must have it. It starts when the Budget is made up.
The third objection to floating—there may be others but this is the third one I want to deal with—is the European one. I speak as one who has been as keen as any that we should become members of the European Community. I recognise that it is not easy to justify each of the members of the Community floating against each other at present. My right hon. Friend the Member for Barnet takes a different view, but he probably agrees that there are advantages in a European float against the dollar. Certainly the right hon. Member for Leeds, East liked the idea. It does not generally seem to be thought of as a bad idea. But few suggest that the European currencies should, for the time being float against each other.
This is because President Pompidou, and President de Gaulle before him, made such a tremendous thing of the common agricultural policy, and the need to have fixed rates of exchange for it to work successfully, that it has somehow automatically been ruled out of court in European circles. What has happened? The Germans have revalued three times, the French have been up and down once or twice and other countries in the Common Market have in the past changed their fixed parities in relation to others. This causes just as much havoc to the common price structure of the common agricultural policy as would floating rates. As the right hon. Gentleman said, there are so many derogations from the CAP that it is not meaningful any more.
If my original thesis was right, that it is probably the rates of inflation together with industrial efficiency—but principally the former—which determine the way in which the values of currencies move, what is essential before we can have either a common agricultural policy of the sort envisaged in the Treaty of Rome or a common European currency, which is the most important subject on the horizon, is that we should have a common rate of inflation and industrial growth. Until that is achieved, there is no merit in forming fixed parities between the member States of the Community. What disappoints me is that we have not made a start in achieving common budgetary policies for Europe.
At the summit meeting my right hon. Friend the Prime Minister agreed to start talks which would have had the effect of bringing the problem of inflation to a common level throughout Europe. There was to be a common policy about money stock and the growth thereof. From the very first day we opted out and said "No, we have a serious problem with unemployment and our other problems. We cannot subscribe to the pure letter of that law." We were excused. It was by saying "Yes" on that occasion, by agreeing to try to get as near as possible to a common rate of deficit financing for Europe, that the first real steps towards a common currency for Europe and a true common agricultural policy could have been taken.
I urge the Government to go back to the meetings of the Finance Ministers of the Community and try to make much better progress towards common budgetary and monetary policies for the Nine. It will take time. I do not pretend it can be done quickly. The short-run situation and circumstances in each country will have to predominate for a brief time. But unless the will is there to adopt these common policies there can be no movement towards a common currency for Europe. If there cannot be that movement it is idle to try to achieve fixed parities within the Common Market.
Now that we are members of the Community and not likely to be blackballed for such an attitude, I congratulate my right hon. Friends on having survived 1st January with the pound still floating. Long may it continue to float and may they prevail upon their European partners, may they negotiate and fight, to have floating currencies within Europe until Europe is prepared to have common economic policies which will enable it to have one common currency.
Those of us who have spent a considerable percentage of our waking hours in the last three weeks cocooned in Committee Room 10 on the Counter-Inflation Bill have learned to regard highly the constructing argument and dulcet tones of the hon. Member for Cirencester and Tewkesbury (Mr. Ridley). I envy the elegance, often the wit and certainly the choice of words which he puts forward his arguments; whether one agrees with them or not, is another matter. I suppose that in following him one could say that we are all floaters now.
I was struck by something that was said by the right hon. Member for Barnet (Mr. Maudling). He said that we used to live in a period when £20 million one way or the other would be a cause for sleepness nights among Treasury Ministers. How times have changed! Sometimes in a debate like this, and today when the Chancellor of the Exchequer was speaking—and indeed when my right hon. Friend the Member for Leeds, East (Mr. Healey) was speaking—one is tempted to wonder what all the fuss is about and the agonies which two Governments have gone through, both the Labour Government and the previous Conservative Government. Therefore, one must welcome a change in the international climate, and perhaps a more relaxed climate.
Yet I wonder whether we are right to be relaxed, because next time it might be us. I think that it would be very unwise, when our roof for the moment seems not to be letting in water, not to take precautions against the storm, because it may well be that another financial storm may come. If we are not in the eye of the hurricane, now—when sterling is not under any great pressure—is the time to reflect seriously on what ought to be done. Therefore this debate is peculiarly timely.
The Chancellor made a very important statement or announcement—I will not say a revelation—this afternoon when he said that a substantial study was being undertaken of whether the European Common Market countries could float together. I think that all of us have been pondering this question. I ask the Minister of State, when he replies to the debate, to reflect on two particular items. First, is it possible for countries to float together if their growth rates are substantially different? If their growth rates are substantially different, can we have such a thing as a common float? I should have thought that if there was more than a marginal difference in growth rate, there would be very real difficulties about any kind of common float.
The second thing on which I ask for Treasury reflection is whether we can have a meaningful common float when there are tight exchange controls in one country, such as the United Kingdom and relatively loose exchange controls in another country, such as Germany. Does this mean harmonisation and synchronisation of exchange controls as we now know them? I put this as a question but I have grave doubts whether one could talks in terms of anything like a common float unless these conditions were met, both in the growth rate and in harmony in exchange control.
I suppose what worries many of us is that we are faced with what looks like an extremely and increasingly chauvinistic United States policy. We have to face the fact that, in spite of some adjustments here and there and, doubtless, good will at meetings, there is the possibility or the prospect of United States chauvinistic policy in relation to trade, certainly a chauvinistic policy in relation to currency and a chauvinistic policy in relation to investment flows. It may well be that the countries of Europe will be hard pressed unless we are prepared to face this together. I do not know whether a common float is the way to do it, but I know that this country's difficulty exists and that there is a very real problem of chauvinism in the United States on trade, on currency and on investment flows.
I should like to hear some comment as to whether the Finance Ministers in the British Government agree that we are right to talk in terms of possible United States chauvinism, particularly in relation to investment flows, and, if so, what protective measures will be taken in time. As I see it, there is a situation in the United States at the moment in which Congressman Wilbur Mills and Treasury Secretary Shultz are actually in cahoot and any idea that there is tension between them is perhaps a pretence on the issue of the surcharge. We have had Wilbur Mills saying that he would like a 15 per cent. surcharge on imports and the Treasury Secretary saying that it had better be 10 per cent.
In a sense this is preparing us—I do not say "softening us up," but preparing us—for a situation in which the countries of Europe will be accustomed to the prospect of a surcharge and can accept it very meekly. Considering the relationship particularly through the multinational companies that many of us represent and which employ many of our constituents, I should have thought that an aggressive policy of United States import surcharges ought to bring the strongest representations from any British Government either by itself or in con- sonance with other European Governments.
In particular I wish to ask about something which has not been mentioned in this debate: that is the meeting between Sir Christopher Soames and President Nixon. There was a report following that meeting that the Americans were taking the attitude "We shall not be rough on the currency or in financial matters provided you, in Britain and the EEC, let in our grain supplies." This was the report in Saturday's Guardian by a very good journalist, Simon Winchester. Simon Winchester does not write things unless there is some foundation for doing so. There has been no explicit denial of that report. I therefore ask whether there has been any pressure from the American Government on Britain in particular and the EEC in general to let in American grain supplies. Are they asking for any kind of quid pro quo and are we discussing any quid pro quo on our part? This would seem to be important.
One of the reasons why I raise the question of a common float is that one wonders whether there may be a coordinated regional policy under this kind of system. Some of us from the regions are very alarmed to hear that the legitimacy of the regional employment system, which for two years—whatever my right hon. Friend the Member for Battersea, North (Mr. Jay) may say—many of us believed was in harmony with the EEC regulations, is in question. Now one understands that this is under discussion. I admit that I might have been naïve about this and my right hon. Friend has every justification for smiling, but I am one who believed that the regional employment premium was safeguarded in the Common Market and we nut direct questions on these lines. It now appears from answers to Questions that this was not so. I put this in the form of a question. Does REP stand up in the present set-up and what would happen to REP, which is absolutely vital for investment expectation in the regions under a common float policy?
I turn to special drawing rights. I understood the Chancellor to say that discussions had been primarily directed to the balance of payments adjustment process and the exchange rate mechanism in a reformed system, together with the whole complex of reserve assets and convertibility. Discussion is now required on a possible link between the allocation of SDRs and the financing of economic development—the so-called SDR aid link—and the problem of capital movements. The Chancellor went on to say that these were complex questions, that it would be wrong to pretend otherwise and that they raised issues of a highly technical and political character. I should like to know precisely what he had in mind and what is the political character of the argument about SDRs. The right hon. Gentleman said that several elements of reform were inter-related in a number of important respects and that discussions had been constructive. I should like to know a good deal more about it, particularly in relation to developing countries.
I interrupted the Chancellor on the problem of identifying the flows of major funds between nations. I asked whether this had anything to do with multinational companies, and I think I am right in interpreting his answer as being emphatically "Yes, this has a lot to do with it". In his opinion my interrogatory question was very relevant. Has this problem been referred to the Morse Committee——
This is an urgent problem. I suspect that Jeremy Morse will be as quick as he can in making his report, but any group of 20 inevitably takes time, and next time there is an economic squall we may have the same problem all over again. I go back to my analogy of doing something about it while the storm is not on and the roof is relatively tight.
I suspect that foreign direct investments and the profits of the United States internationals are being discussed along with taxes on portfolio capital. I think that the Minister of State is to say something about this. I asked about the interest equalisation tax. I will not say that the Chancellor evaded the question, but he said that it would be answered in the winding-up speech. At present the tax is 11½ per cent. on the capital value of loan or share issue. I understand that it deprives American financial institutions of foreign underwriting. In a sense it is linked with the take-up by American money of industries in Europe and, although I would not go along with him, perhaps this was what General de Gaulle feared most.
What is being done on a European basis about foreign direct investment by the United States and the changing of a law that Wall Street does not like very much? What is being done about tax equalisation and the possibility that the Senate will not continue it, as the President wants, for the next 18 months but will bring it to an end at the end of March?
On exchange equalisation controls, which may have the effect—as they are often designed to have—of making New York as important a capital market as London, again a Treasury view would be worth while.
One other subject which should be discussed in this context is, how, if we are to have a common float, the level of public spending between EEC countries can be synchronised. I am thinking of, for example, estuarial pollution, a subject that is becoming increasingly important to many of us. Hon. Members whose constituencies are on the banks of the Forth, the Clyde, the Tyne, the Mersey, or the Humber know all about it.
The Royal Commission on the Environment, under Sir Eric Ashby, has made many expensive recommendations, and we have today the excellent report of Mrs. Elizabeth Porter. There can be no coherent policy if the levels of public spending in one country are absolutely out of gear with the levels of public spending in another. Therefore I hope that the financiers, when they discuss massive public spending, will include in their discussions not only the Tees, Humber, Clyde and Mersey estuaries but also the Rhine estuary.
A good deal has been said about Japan. Those of us who have had the good fortune to visit Japan know that it has the greatest pollution problems in the world. Japan needs a public spending programme and concentration on the problems of private squalor more than any other country. The Japanese, for all their wealth and success at one level, have perhaps failed more than any of us in the quality of their environment.
It may be asked how this is relevant to an international monetary debate. It is extremely relevant. If the level of public spending in Japan were anything like the level of public spending in Europe, we should not be worrying to the extent we are about the nub issue which is, as the hon. Member for Kingston-upon-Thames (Mr. Norman Lamont) mentioned at Question Time, the level of the yen. Therefore, my arguments about pollution are not as circumlocutory as they appear to be. If the Japanese could be persuaded to do what is any Government's duty to its citizens and have a massive public spending programme for the Tokyo and Osaka complexes, many of our monetary problems might be eased. I am not asking for a level of military spending by the Japanese in line with European level of military spending.
If the yen is at the heart of the matter, the international financiers should have discussions on how this problem can be solved. It is not a miracle answer or a panacea answer, but I stick to it in the face of ribaldry. If the Japanese could be persuaded to do something about their pollution, to have a massive public spending programme and perhaps to buy the anti-pollution, reclamation and recycling equipment now being made in Western Europe, some of the problems that most worry us today would be solved.
When the international financiers, the Morse Committee and others get round the table and talk, I hope that the level and scope of their discussion will be a good deal wider than the technicalities of the bullion market, and exchange controls. I do not suggest that these are not critically important issues. All I say is that I hope the discussions will be in the wider context of public spending and that the Morse Committee, the British Government and others will take these matters, such as the level of Japanese public spending into account.
The hon. Member for West Lothian (Mr. Dalyell) is a relative newcomer in financial debates. We have not often had the pleasure of hearing him, and he covered a wide field. I do not remember having heard much about estuarial pollution in previous finance debates, but I do not say that it is unwelcome.
I was interested in the hon. Gentleman's references to the United States. He brought in the word "chauvinistic" no less than six times in one breath. I know that word only in connection with male pigs and the female liberation movement. I do not know whether the hon. Gentleman spends his spare time in their company, but the association was a little strong. I was also rather tickled at the idea that an old gentleman, Wilbur Mills, who is chairman of a very important committee in the United States Senate, should be someone who could be softened up. He is the most crusty old gentleman it has ever been my pleasure to meet.
I am grateful to the hon. Gentleman for putting me right.
I want to start by saying something which I believe to be wholly uncontroversial to both sides of the House. Since our last debate we have had news of the impending retirement of the Governor of the Bank of England. It is not for me to say anything about him in the conduct of his office, save in one connection only—the great service he rendered to the Bank and to this House when he came and gave evidence for the best part of six consecutive months to the Select Committee on Nationalised Industries. There had been a long legacy of mistrust between the Bank of England and the House of Commons which I believe certainly went back to Lord Macmillan's Committee on Finance and Industry which sat in 1930 and published its report in June 1931.
Lord Keynes was a member of that Committee, as was Mr. Reginald McKenna, and both were longing to get the Governor of the Bank of England, then Montagu Norman, to give evidence; but he showed no willingness to do so. Eventually he was dragged out and he gave evidence, and he gave it very badly. The person who tied him up in knots was not the eloquent Mr. McKenna or the brilliant Lord Keynes but Mr. Ernest Bevin. I believe that to many people in his country that was the first time the name of Mr. Ernest Bevin achieved its real mark of significance.
The right hon. Member agrees with me on that. Despite that gloomy precedent, Sir Leslie came and gave evidence and laid on a full programme for the Committee which was presided over by the hon. Member for Poplar (Mr. Mikardo), who I imagine could not be expected to give much quarter to a hostile witness. Sir Leslie gave evidence with extreme generosity of time, with complete frankness and with very good feeling. I am sure that whatever secrets the Committee expected to extract from the bank, and whatever ideas it may have started with, it discovered nothing discreditable. More than that, however, certain facts were brought to light. As the Committee's recommendations were in the main accepted by the Government, I believe that the Committee did a good job. Certainly Sir Leslie was extremely helpful in mending relations between the Bank of England and this House. I hope that the House will not mind those comments, which are not as far from the subject of this debate as estuarial pollution.
It was a great revelation to the Committee to know that the accounts of the Bank of England were never seen in the Treasury and that the Chancellor of the Exchequer never saw them. But of course there was one branch of government that saw them. That was Somerset House. There seems something peculiarly British, of which one need not be ashamed, in the fact that Somerset House should have access to information which was not available to either the Treasury or the Chancellor of the Exchequer.
I now turn to the subject of this debate. The trouble from which we are suffering is the so-called Euro-currency which the right hon. Member for Leeds, East (Mr. Healey) characterised as foot-loose. He put a figure of 100,000 million dollars—100 billion dollars—on this. But what is this currency? These are dollars that are neither invested nor spent. Where do they arise? I am rather surprised that no one has touched on this aspect. They are purely fortuitous. In the first place they began, I believe, by an action in the United States, a policy of investing abroad, at a time when United States dollars were unconvertible into any medium of exchange. They have been greatly added to by the acquisitions of the oil-producing States of the Persian Gulf, the OPEC countries.
There is a very good article in a paper called Petroleum Press Service this month, "Questions for the Billionaires". to which I shall refer later. I want to refer first to the extent of this problem, the 100 billion dollars. In the Financial Times today we read that the French authorities have been forced to acquire 5 billion unwanted unconvertible dollars. I have no doubt that the Germans have a great deal more than that. They rise, in the first place, from American investment policies. To quote the Petroleum Press Service, the revenue of the OPEC countries went up from 4½ billion dollars in 1966 to 15 billion dollars in 1972 and are estimated to be no less than 56 billion dollars in 1980. So we are really dealing with something which could double the amount of dollars in circulation.
The smooth working of international commercial relations requires that Governments should play the game according to the rules. There seems no reason to suppose that Arab Governments are aware of any rules in these matters; and Governments which accumulate large financial reserves have it in their power to harm the economy of others. That is a platitude. But the obvious way to obviate the trend would be for the OPEC Governments to spend their revenues and not allow them to pile up in large financial reserves.
How far is this feasible? There are limits to the amount of money that can be spent on the population.
Yes, even estuarial. There are limits imposed by lack of education, lack of know-how and numbers in the Gulf countries. It is a problem for them to spend their money. These countries are adding to their funds all the time. The right hon. Member for Leeds, East spoke of this currency as being foot-loose and he also mentioned the possibility that one should be able to trace the origin of funds. One would have thought oil funds could be more easily traced than most, not because they leave behind a smear but because there are definite channels through which they will be paid. I would have thought it was not beyond man's inventive powers to devise a method of dealing with these funds in the hands of recipients so that unless they were spent, and spent as the recipients desired to spend them—because one should not inhibit their expenditure—or invested within a certain time, they should be dropped.
I agree with that. I used the word "invested". There should be an Arab Development Bank. A large proportion of these funds is circulating in this narrow market and causing great destruction. The amount is increasing, and I echo the view of the hon. Member for West Lothian that at this stage, when the heat is not on, we should put our heads together to deal with the difficulty. This is an international problem and not merely one for us. It is a problem for all Western nations. It is also a problem for the United States.
The hon. Member for West Lothian is not here at the moment, but he seemed unduly suspicious of the activities of international companies. I must tell him that these companies are run on businesslike lines. They do not have enormous bank balances. They have enough funds in the various countries in which they operate to run their companies. Therefore, if it is a question of moving funds, the amounts moved from one place to another are only marginal. They do not move a whole factory because there is a change in the rate.
Let me give the House an indication of how little defended we are to deal with these movements. According to the Union Corporation, the total gold holding of the Bank of England is down to 100 million fine ounces, which even at the current price of gold comes to about 1,750 million dollars or £700 million, but we are talking of countries which are to have a revenue of 56,000 million dollars by 1980. The United States has a huge gold holding, but it is a negative one. It has more gold earmarked than it holds. It has the expense of guarding a lot of gold in Fort Knox which belongs to other people. The United States is in deficit.
There are no defences to this enormous, uncovenanted movement, because the Euro-dollar was originally of modest growth. It is only since the OPEC nations have been accumulating these large amounts that the problem has become so acute. It is becoming more acute all the time, and I echo the words of the hon. Member for West Lothian that this is the time to put our house in order.
We have been discussing the recent negotiations and it seems to me that it is rather like playing in a bridge tournament on a luxury liner. The game is all nice and warm. When it is over the score is added up and it is found that someone has gone up and someone has gone down; somebody has done better and somebody has done worse. Everyone is happy, but then some water starts coming in. The band next door, which had been playing the "Merry Widow" waltz changes to "Nearer my God to Thee" and the name on the hull of the liner is "Titanic".
These are conditions which one can see and foresee. They are conditions about which, in co-operation with others, we are in a position to do something. The last thing we want to do is to enter into a slanging competition with the United States. I cannot follow the hon. Member for West Lothian in what he said. For us to quarrel with the United States would be like a man getting drunk to celebrate the fact that he has been cut out of his father's will.
We have working co-operation in Europe and with the United States. As my right hon. Friend the Member for Barnet (Mr. Maudling) said, the system has worked. Let us now try to see whether we can make it work even more efficiently and prepare ourselves for the stresses and storms which must be on the way.
My right hon. Friend the Chancellor of the Exchequer has firmly stated on a number of occasions that his policy is one of fixed but adjustable rates. The trouble with such a policy is that it is a speculators' paradise. It is a case of "Heads I win, tails you lose", and therefore I must part company from my right hon. Friend on that matter.
Ideally, one should have a system of permanently floating rates.
I am pleased for my hon. Friend's sake that he is able to give me some encouragement on that, but I part company from him too. There are many problems. My hon. Friend dismisses the commercial problems, but they are very real. Businessmen have difficulties in contracting, and for their sake it is essential to have some sort of fixed rate. Particularly in the context of the common agricultural policy, it must be clear to hon. Members on both sides of the House that some system of fixed rates is essential if the Common Market is to work at all.
I am driven to the solution which has already been deployed by my right hon. Friend the Member for Barnet (Mr. Maudling). He advocated a two-tier system. There could be a floating sterling rate for financial transactions and a fixed rate for commercial ones. I know that there are problems of policing currencies, but in this country at any rate the Bank of England has shown great sophistication and I do not foresee any severe problem in keeping the two types of transaction separate.
I look forward to the day when not only in this country but in every other civilised country there is a floating rate for financial transactions and a fixed rate for commercial dealings. It is essential to get away from the situation in which we in common with other countries are at the mercy of "hot" money. Businessmen are entitled to be prudent and to place their money in those countries where they think it will be safest.
To my mind it is essential that every country should have control over its own money supply. I am not a monetarist but I recognise that the many problems that we have of inflation must to a degree depend upon the extent to which a Government can control the money supply of their own country.
There are many factors which cause money supply to go up faster or slower. The two principal ones are excessive Government expenditure without corresponding increases in taxation, and hot money from abroad. A two-tier system of exchange rates would go a long way to eliminate the second of those problems and would enable the Government to control our money supply. It is principally on this basis that I advocate some system of two-tier rates in any future exchange policy.
The hon. Member for Truro (Mr. Dixon) put forward the two-tier solution based on floating rates on capital account and fixed rates on current account. Although this has a superficial attraction in the context of a return to the snake in the tunnel experiment of reduced parity deviations run on a central point, there would still be the difficulty that if there were any marked variation in inflation or growth rates such a system would still not be very much more satisfactory than is the present system. However, I agree that the two-tier system would get over the major problem of compounding capital movements, particularly where there is a reserve currency rôle.
What makes the international monetary situation so grave is that three critical issues confront the country more or less simultaneously. The first is that at present there is strong pressure on us, particularly from France, to re-peg the pound at about the same time as the continuing deterioration in the balance of current account makes a capital flight out of sterling before the end of this year very likely, with unsustainable pressures on any reasonable selective parity if we re-peg the pound beforehand.
Secondly, at a time when Britain's exports badly need improvement there is the problem of substantial trade protectionist sentiments in the United States, which perhaps this time may carry the day and which certainly would have a serious impact on British trade.
Thirdly, there is the cloud, perhaps no bigger than a man's hand, of renewed pressure for closer monetary integration in Europe, which is fundamentally impracticable without much more far-reaching political and economic changes than have so far been envisaged, at least publicly.
Perhaps the most immediate objective is to dissuade President Nixon from imposing unreasonable restrictions in his forthcoming Trade Bill. Trading restrictions occur on all sides and it should prove possible to diminish them by mutual concessions. But the key to the problem will hinge on the capacity to construct a system in which the United States has some freedom to devalue much more easily at its discretion with the same obligation to meet deficits in terms of non-dollar users as have other countries. There can be little stability in the system while the most powerful country in the international monetary fund cannot unilaterally, even now, without major convulsions change its own parity in relation to other currencies.
There are several solutions to the problem even assuming that gold is ruled out simply because the Group of Ten do not want it as the key to the system. There can be little doubt that the most satisfactory system would be for the dollar to be fully demonetised internationally instead of the dollar being retained as a reserve asset. This could happen only if the existing dollar balances were transformed into some new international monetary unit quite separate from the domestic currency within the United States. This at least would enable the United States to vary the dollar much more flexibly in terms of this new unit in exactly the same way as do other countries.
If it were felt that this new numéraire required some backing, it would be far more satisfactory if this were provided, not by gold, but by an agreed set of commodities, as some UNCTAD economists have put forward. This would spread the source of moneymaking power much more widely among the commodity producers of the world and would tend to generate the maximum attainable rate of growth in the world economy and in conditions of more stable prices, at least for basic materials. That should be our objective, for it is the supply of food and basic materials which limits the rate of growth of world industrial production and not, as now, the rate of growth of effective demand in the advanced countries which determines the growth of demand and production of primary commodities.
Unfortunately, such a desirable reform of the international monetary system which, like all convoys, tends to move at the pace of the slowest member or the least enlightened central banker, is unlikely to emerge. In practical terms, the most that can be hoped for out of the present situation is a significant extension of the SDR scheme.
I fully support the efforts made to achieve this by the Chancellor of the Exchequer at the September 1971 IMF meeting, although as my right hon. Friend the Member for Leeds, East (Mr. Healey) said, I am disappointed that it has not been followed up more forcibly since that time. The best early solution to the problem referred to by the hon. Member for Walsall, South (Sir H. d'AvigdorGoldsmid), namely the vast dollar overhang of 60 billion dollars short-term United States liability, is surely the Italian one that they should be traded in as a swap for expanded SDR facilities.
The most worrying issue for Britain at present is not so much the continuing opposition to an ultimate monetary reserve which has no intrinsic value. It is rather the political pressure within the EEC to move towards a collective float against the dollar, on the widely felt grounds that the possession of some European reserve currency is in some sense a necessary part of world-power status. This would not only drag up the pound against the dollar and thus do away with some of the advantage of the 10 per cent. devaluation of a year ago but, much more seriously, it would tie the pound to the stronger European currencies, with results that are bound to reproduce quickly and even more drastically the debacle of a year ago.
But the effect on the pound of an attempt to achieve a common European reserve currency would be even worse since the EEC would have to establish such a marked collective over-valuation against the dollar and other currencies that it could run a deficit against the rest of the world for a year or two years, or perhaps for a decade or two. There would appear to be no other way by which a joint European unit could find its way in substantial amounts into the reserves of other countries. Yet the impact on Britain of such a change, as long as Britain remains inside the EEC, would be extremely serious in that Britain, perhaps more than any other advanced industrial country, has already suffered the chronic disadvantage of an over-valued currency.
Whether these European pressures develop now or within the next few years—and they are certain to develop sooner rather than later as a result of the Paris communiqué of last year—they must either force Britain in a limited sense to exit from the European experiment or alternatively they must force much bigger political changes than have so far been discussed. I believe that the right hon. Member for Barnet (Mr. Maudling) and the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) were absolutely right to insist that that would be the result.
A semi-immutable pattern of exchange rates is possible only if there is a close approach to political union, which demands a federal treasury a federal central bank and presumably also a federal parliament, because surely, without a very high degree of centralisation, there is no adequate means of preventing inflation in one member country from advancing at a much more rapid rate than in another. At least that has been our historical experience in recent years, and very forcibly so.
The crucial point that has been lacking from the Government's case as it has been stated today, therefore, is what resolution it envisages for this fundamental dilemma. I make no apology for going over this point, which has indeed been expressed before, and rightly so. It seems necessary for the Government either to make it clear that there is a tacit commitment to a much higher level than has been achieved of political and economic centralisation or, if not, to make it clear how a series of fixed but movable parity adjustments for sterling would be avoided that would otherwise effectively spell out successive devaluations.
At present there is no such assurance, and it can be seen why. There is a real problem as long as sterling retains a reserve-currency role, where, again, the Government's position is not clear. What proposals do the Government have for the protection of the British balance of payments against movements of hot pounds in the kind of run on sterling that is virtually inevitable in this country before the end of this year if the pound is re-pegged? It is all very well to erect more formidable exchange controls within the EEC against vast shifts of hot dollars, but how are the Government to prevent a haemorrhage of hot pounds within the EEC in the all-too-likely event of a United Kingdom trade crisis in the near future?
In view of the German precedent over the past month, it is very difficult to have confidence that exchange controls will be imposed in such a situation sufficiently rapidly and firmly to prevent repeated drains on sterling. But until the Government can give some plausible conclusions as to how to resolve these twin dilemmas, their present commitment to a series of monetary objectives that are either inconsistent or in some cases plainly illusory can at the present time command neither confidence nor wholehearted respect.
Hon. Members on both sides of the House have been very ready to criticise other countries for the present worrying state of the international monetary situation. The hon. Member for West Lothian (Mr. Dal-yell) thought that the Americans were too chauvinistic. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) thought that the Japanese were too ruthless. My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) thought that the Arabs were too rich. To listen to their speeches it might be thought that we in Britain were really the one good boy and everybody else was out of step. But the curious thing I find as I travel around the world is that the one thing about the monetary situation on which the Americans, the Japanese and the Arabs agree is that Britain has grossly mishandled sterling since the war and is a prime contributor to the present situation. So we cannot suppose that this problem will be solved by blaming other people. I very much echo what my right hon. Friend the Member for Barnet (Mr. Maudling) said earlier in the debate when he pointed out that we would always have a problem in the international monetary field and that anybody who looked for simplistic and complete solutions to that problem was likely to be disappointed.
Inevitably we must oversimplify when dealing with those complicated economic matters, and I am now going to do exactly that. I am going to say that I believe the root cause of inflation throughout the world can be summed up in a single striking phrase which Adlai Stevenson once used in a quite different context—"the revolution of rising expectations". Hundreds of millions of ordinary people in almost every part of the world are shaking off the fatalism and mysticism with which they traditionally defended themselves from poverty. Increasingly they are coming to expect and demand the material prosperity which was formerly the preserve of the privileged few. Nowhere is this more true than in Asia, the continent towards which the balance of financial power is steadily moving and is likely to continue to move. It has become the first preoccupation of Governments everywhere to seek to satisfy this insatiable new demand for a living standard which will rise each year.
Inevitably in this situation the production by Governments of paper money tends to exceed the production by people of real goods and services. The result is world-wide inflation and an unstable international monetary situation, which makes the fixed parity system agreed at Bretton Woods more and more difficult to operate as each country strives, outside its election year, to inflate a little more slowly than its neighbours. In this context, the greatest single technical contribution we could make to our own economic competitiveness would be to return to septennial Parliaments. This worldwide revolution of rising expectations sets the stage for today's debate on the international monetary situation, which has, I believe, replaced the danger of war as the greatest single threat facing the world at this moment.
On this stage there are three major dramas to be enacted and, it is hoped, resolved: the huge present and prospective surplus of Japan; the even bigger prospective surpluses of the Middle East oil producers; and the 70 billion Eurodollars already washing around the world and threatening the currencies, the economies and so the standard of living of every country in turn.
I would submit that the first essential for clear thinking on this subject is to rid one's mind of the superficial cant about speculators, Swiss gnomes, greedy oil sheikhs, fanatical Japanese workers and the whole outdated galère of Left-wing demonology. No doubt such gentlemen exist, but they are only a very peripheral aspect of this major international problem. The essence of the problem, the very thing which makes it so intractable, is that it is a drama, as in a good Agatha Christie play, where there are no easily identifiable dyed-in-the-wool villains but plenty of potential and fairly innocent victims.
Of course, the surplus countries have their obligations, but so do the deficit countries, and I am profoundly thankful that we in Britain are at least shaping up to our obligations in this respect, with the Counter-Inflation Bill.
Many hard things have been said about Japan in this debate, and I accept, of course, that the very big Japanese surplus poses a serious problem and that the yen is a key factor in the international monetary situation. That goes without saying. But I think it is all too easy to blame the Japanese and very unwise of us not to make the effort to understand the way they see the problem. We must remember the special nature of the Japanese economy. It is really different from all the other economies of the world. It is an extremely efficient processing economy which depends very largely on huge imports of raw materials, which are then processed with the greatest efficiency and exported all round the world.
Precisely because of that fact, those who lay great emphasis on the need for a revaluation of the yen may be making a fundamental mistake. One effect of a revaluation of the yen is to cheapen the cost of all the raw materials which Japan buys and then processes. Each time the yen is revalued it is possible and, as the Minister of Finance of Japan said to me last month, even probable that the effect over the short term will be merely to increase the Japanese surplus. So, as in other spheres, I do not have too much faith in the capacity to solve this problem by purely monetary means.
It is also important to try to look at the situation in the way that the ordinary Japanese does. To the ordinary Japanese man working extremely hard, all this talk about the strength of the yen and about the huge Japanese surplus is meaningless. Like his English counterpart, he is interested only in what there is in it for him. The truth is that to the ordinary Japanese working man his housing and his welfare benefits are significantly poorer than they are for people in this country.
The great mass of the Japanese have not yet benefited from their huge surpluses, but they suffer from a revaluation. They have a real sense of being hemmed in and beaten down by a conspiracy of rich industrial nations of European stock. It is very important that we should not again make the mistake with Japan that was made in the 1930s. There is a real danger that if Europe and North America appeared to them to gang up against Japan we could be repeating the blunders that were committed in the early 1930s, and so might they. We have to be very careful in handling this problem. It could have serious long-term political and diplomatic consequences.
The Nixon shock method of economic diplomacy carries with it very great potential political dangers. The Japanese leaders whom I have had a chance to meet from time to time in the past year or two are very much aware of international opinion and of the need to change course. One has only to look at the recent Japanese budget to see that great efforts are being made to switch resources from industrial investment to social welfare, to switch exports to home consumption, to facilitate and encourage imports and to increase aid to underdeveloped parts of the world.
In the hon. Gentleman's eulogy of the Japanese of the 1930s, has he taken into account their co-prosperity objectives which were an integral part of Japanese industrial policy at the time and which led to their involvement in the last war? What is more, bearing in mind the hon. Gentleman's eulogy of the Japaneses as they are today, is he aware that some of those policies appear to have survived and that, in the words of the Economist, we may be heading for a trade war?
The hon. Gentleman's description of me eulogising the Japanese policies of the 1930s is so wildly absurd that I shall not even bother to reply to it. I was making the serious point that the Japanese felt economically and militarily isolated in the 1930s and that that led to terrible trouble for the world. We must learn from that lesson and not treat the Japanese in such a way that they feel isolated and browbeaten again.
It is precisely because I wish to avoid the danger of a trade war, which is all too real at present and which in my view would not be restricted to the Japanese but would spread through the whole world and result in a world recession, that I want to see a serious and intelligent diplomatic approach. I am not saying that we should not talk frankly in private to the Japanese leaders. I am sure that that is essential and that my right hon. Friend the Prime Minister did so in Tokyo recently. I am not saying that we should adopt a wait-and-see attitude. But I think we should give the Japanese leaders adequate time to co-operate, that we should appreciate that they have real problems that they are a democracy and that they have an electorate whom they have to satisfy, just as we have.
I turn from the Japanese to another category of people who have been abused in the debate. I refer of course to the Middle Eastern oil producers. Here again if the matter is to be handled intelligently we have to make an effort to see the situation from their point of view. It is not their fault that they have oil. They are living in an area where for centuries there has been some of the most grinding poverty anywhere in the world. The Western world, including Japan, desperately needs their oil and our own industry and the prosperity of our people depend on that oil to a considerable extent. They sell us that oil on a satisfactory two-way commercial basis. Naturally they bargain, just as Opposition Members want their trade unions to bargain, for the best possible terms. But the idea that the Middle Eastern oil-producing countries are culpable because at last they are in a position to raise their standard of living and have substantial revenues seems to me to be extraordinarily insular and unsophisticated.
The problem is that their oil revenues are going up at such an extraordinary pace that it presents tremendous technical difficulties in terms of employing them usefully. The leaders of Arab countries are well aware of these problems. The Middle Eastern oil producers will have an annual income of more than 50 billion dollars by 1980. There is no possible way of their employing these funds in their own countries, although the growth of local money markets in places like Singapore, Hong Kong, Beirut and Kuwait will make some contribution. But those markets depend on political stability and many of the locals in those parts of the world are not convinced that political stability in their areas is permanent. Even so there will be these enormous surpluses which cannot be employed locally——
Is there any price elasticity in oil? If these huge sums are to be asked, we shall have to find ways of substituting for oil. Does not my hon. Friend believe that it may not be quite as bad as he is saying?
That may be so, but the other argument which naturally the Arabs themselves are examining carefully is whether they should not keep more of the oil in the ground which would have the opposite effect and push up the price still higher.
The significant fact is that the United States is becoming a very big importer of oil. The Soviet Union is about to become an oil importer. The likelihood is that the price of oil will continue to rise and oil will continue to be in great demand. However, I do not want to get sidetracked into a separate discussion, however interesting, of the future financing of the oil industry. I am concerned with the narrower point of the effect of these enormous surpluses on the international monetary situation as they build up in the next 10 or 20 years.
I suggest that those hon. Members who have suggested that the oil-producing countries have been a major contributor to the recent monetary crisis are being less than fair. As my right hon. Friend the Chancellor of the Exchequer said, it is very difficult to trace where the money comes from, which money moves where, or who is responsible for this monetary crisis. The fact is that not only have most of the Arab Governments, central banks and major Arab institutions behaved very responsibly in international finance over the years; most of them have made massive losses out of the recent international monetary crisis. In their terms, the simultaneous devaluation of the dollar and of sterling has been impossible for them to avoid. There is probably not a single Arab bank and certainly not a single Arab country which has not made huge overall losses as a result of this recent international crisis. It is not right for some hon. Gentlemen to suggest that the Middle Eastern oil producers have caused this crisis. That does not mean that there is not a great problem about their surpluses for the future.
I should like to consider possible ways in which international co-operation can work towards helping to solve this problem. Clearly, as a country's reserves continue to climb out of phase with the international system as a whole, it has an obligation to adjust its currency accordingly. But Middle Eastern oil-producing countries cannot be expected to continue to revalue their currencies indefinitely, because of the internal effect on their populations. They can contribute to the development of other countries and keep their own reserves stable by investing in industrial development on a world-wide scale and investing firmly in long-dated bonds overseas which the Governments of the countries concerned can use to develop those countries. This is as much in the interests of the Middle Eastern countries as everyone else's. I believe that many of their more responsible leaders see that.
It also gives an added urgency to the need for a fair settlement of the Arab-Israeli conflict towards which one hopes that the vast wealth of some Arab countries could be a helpful contributor.
It is all very well in theory to suggest that the Arab countries should invest in the world, particularly in long-dated bonds, but whether they do so surely depends on many individual decisions. It depends on an adequate profit return. It depends basically on confidence in the currencies of the countries in which they might wish to invest. It seems little use suggesting that the solution of the world's financial problem is for Arab countries or Japan to invest abroad. We cannot order or invite them to do so. All we can do is to ensure that our currencies are stable. Is this in agreement with what my hon. Friend is saying?
There is much force in what my hon. Friend has said, but countries which have enormous surpluses which they cannot employ at home must find some outlet for their money. It may be better for them to invest in bonds which will be devalued every five years or so than not to employ their money at all. There is the additional problem that the surpluses in the Middle East will be so great that if used solely for direct investment they will buy up the whole of industry in Western Europe and North America. Clearly, the countries in those areas will not want that to happen, so a great deal of thought must be given to the problem. The worst way to approach the problem is in a mood of criticism of Middle Eastern countries. They recognise the problem, to which the Committee of Twenty under the chairmanship of Mr. Jeremy Morse will no doubt be giving a great deal of attention.
The third sphere in which we have a serious monetary problem is the Eurodollar market. This latest crisis underlines again the necessity for a greater degree of intergovernmental control of the Eurodollar market. We in the United Kingdom have forbidden the borrowing of Eurodollars for less than five years. The Germans insist on the borrower making an equivalent deposit in deutschemarks. However, recently, speculators have been prepared to borrow deutschemarks in pursuit of a certain profit.
A possible way of regulating the market is the imposition of negative rates of interest on funds which move more frequently than is thought suitable. Here again, a lot of thought must be given to the exact way in which it is handled. However, it is certain that there will have to be a greater degree of intergovernmental control of the Eurodollar market than in the past. Of course, we must he careful not to throw out the baby with the bath-water because, for all the problems that it poses, the Eurodollar market is an immensely valuable new financial mechanism doing a great deal of good work in the financing of industrial development all over the world.
Speaking in this House on 24th January, before this latest monetary crisis broke upon us, I said:
we should look at the possibility of a two-tier exchange rate structure which would separate our capital and current accounts."—[OFFICIAL REPORT, 24th January, 1973; Vol. 849, c. 535.]
I repeat that request to my right hon. and hon. Friends with an even greater sense of urgency today.
The basic problem which has so far defied solution is how to defend exchange rates from free capital movements. On the one hand, a reasonable stability of exchange rates is desirable in the interests of international trade. On the other hand, freedom of capital movement is desirable if international investment is to be efficient. Yet every sterling crisis and every international monetary crisis in recent years has started with a flight of capital from one currency to another. The best way of reconciling these conflicting needs would seem to be a universal extension of a two-tier exchange system. There should be fixed, though adjustable, parities for current transactions and floating rates reflecting the play of market forces for capital transactions: a fixed commercial pound and a floating financial pound.
What I have just said in no way conflicts with the announcement made earlier today by my right hon. Friend the Chancellor of the Exchequer about a study by EEC countries of a joint float. I think that this would fit in with it very well indeed.
Last week in the House and again today my right hon. Friend rightly said that a two-tier exchange structure would not have averted the recent crisis. But I put it to him that a two-tier mechanism could be a blessed comfort to us in the next crisis, whether it is joint with the other eight countries of the EEC or unilaterally operated by us.
I am particularly glad to have heard the whole of this important debate today. I should apologise to the right hon. Member for Stepney (Mr. Shore), who I understand will be winding up for the Opposition, if I am unable to stay to the end of the debate.
I am the only Member of this House who is also a member of the Economic Affairs Committee of the European Parliament, and it was invaluable for me to hear the series of excellent speeches which have been made by right hon. and hon. Members on both sides of the House.
There are two reasons for optimism after the recent crisis. One is that the dollar is becoming an ordinary currency and no longer has the rather spurious chosen virgin status that it had under the Bretton Woods Agreement. The other is that the general structure of exchange rates is becoming more realistic than in 1970, although there are still significant changes to come.
The Japanese economy is in substantial surplus and is likely to remain so in the immediately foreseeable future. American capital exports, which have contributed a great deal to our difficulties and the capital markets, are still overhung by huge masses of mobile expatriate American dollars which are capable of causing havoc at any time, as they have done in recent weeks. So the balance which has been achieved by the recent settlement is unstable and we cannot hope to remain as we are for very long.
My right hon. Friend the Chancellor of the Exchequer referred to the reform of the world monetary system which is being studied by the Morse Committee. I am sure that all right hon. and hon. Members wish Jeremy Morse well in his labours. We know that Morse is trying to find a new world numéraire to replace the dollar and also to take the place of gold. I am bound to express some scepticism as to whether SDRs in the long run will fill the need.
My scepticism perhaps has the very good reason the Chancellor of the Exchequer and also Mr. Giscard d'Estaing virtually committed themselves at the September meeting of the International Monetary Fund to the view that in future SDRs should take account of the needs of the Third World. That is probably an essential commitment, but it does not recommend SDRs as a replacement for gold in the long run.
It might be advisable if we tried to find some world numéraire other than the SDR so that SDRs and other currencies could be expressed in terms of that. I fear that with the passage of time, the SDRs are likely to become more and more common currency and to depreciate. The reformed IMF might well adopt the European Payments Union formula under which the numéraire was automatically linked to whichever currency was proving to be the most stable at the time. This may be the nearest we can come to a replacement for gold as numéraire for the world system.
My right hon. Friend also spoke about the progress towards European monetary and economic union. On the continent the crisis is giving rise to a quite different line of thinking from that in this country, to judge from the speeches I heard in the economic debate in Luxembourg last Thursday. Members of Parliament of all shades of opinion tended to express the view that as a result of the crisis we must advance with greater speed towards European monetary union and that we must hasten to narrow the margins of fluctuation either side of the fixed parities in foreign exchange markets, which I thought was a particularly dubious recommendation. There was also mounting pressure for the fixing of the sterling parity at the earliest possible date.
On the other hand, in Britain the crisis has tended to make for greater scepticism about union and extreme caution about fixing the sterling exchange rate or even indicating the date when we might fix the rate again.
In recent years there has been a very great change in the outlook of British orthodox financial opinion about the advisability of sterling remaining on the floating rate. I can recall the horror expressed 20 years ago when Wilfred King published two articles in The Banker recommending that we might consider floating rates. At that time, I do not think that he had many friends in orthodox financial circles nor, indeed, in the Treasury.
My third reason for optimism at present follows on from our relationship with the other countries of the Community, namely, the "fixed but adjustable" compromise reached at the Summit Conference last September. Now we must follow up the Summit Agreement.
First we must look at the institutional development planned for the immediate future, because before 1st April it is intended to set up the European Fund for Monetary Co-operation which was envisaged in the Werner proposals. The Draft Memorandum and Articles prepared by the Commission has been made available to members of the Economic Affairs Committee, but I do not know whether hon. Members have had the opportunity to see this. It contains no surprises. I was disappointed when I read it because I thought it was so rudimentary as scarcely to constitute a new financial institution at all.
Some people see the European Fund as a gadget which would help central banks in smoothing operations. Others regard it as yet another lunch club for central bankers and do not expect anything very much to come of it. I prefer the suggestion that it might turn, at any rate in the immediate future, into a study group, drawing on the Bank for International Settlements for its routine banking services and possibly on OECD for technical studies, with particular reference to the structure of parities and trends in the European economy.
The European Fund should make itself responsible for building up what has been called a bundle of indicators to help national financial authorities to decide on the timing and extent of future parity changes, implementing the fixed but adjustable formula, and, I hope, laying emphasis on the adjustable end of the compromise rather than on the fixed side of it.
As to this new institution, I hope that the Fund will soon have a real fund which will enable it to intervene effectively in currency markets, and a board of real authority so that it can function largely independently of the Council of Ministers. If this is not the case, judging from one's experience, it will hardly be able to function at all.
It should also seek to have the closest possible relations with what one might call outer Europe, particularly Switzerland, Austria and Sweden, which countries are very anxious to continue to cooperate with the Community as closely as possible in monetary affairs. In addition, the Fund should seek the closest relations with the American authorities and the IMF. It would be disastrous if this European institution were to be a purely inward-looking organisation.
As to other forms of collective European action, I welcome the Chancellor's announcement of the study of the possibility of a joint float. I have long thought that the European cluster of currencies would probably have wider variations in exchange rates with the other major currencies such as the yen and the dollar than it would have within itself as progress was made towards economic union. The precide mechanism for a joint float therefore requires the closest attention.
1 hope there will be a fuller analysis of the two-tier markets. It has been a matter of great interest to me to hear so many well-informed speakers this afternoon emphasising their belief that this is the way ahead. I am strongly inclined to share that view.
It may be worth asking ourselves why there is this pressure from the other countries of the Community for a return to a fixed rate for sterling. Partly, of course, it is because of the greater ease of operation of the common agricultural policy.
Last month we agreed the notional rate for sterling for exchanges of agricultural goods which became known as the representative rate. It is unfortunate that events have already overtaken the representative rate and made it rather an artificial one. But I think we acted correctly in agreeing that, for purposes of trade in agricultural products, we should have a notional rate for sterling even while the float was continuing.
Next we should try to find some means of helping small traders who find floating exchange rates confusing or embarrassing and who need to have a simpler system in order to carry on their transactions. If we adopt the "fixed but adjustable" formula, there will be an obvious need for a dependable futures market for transactions which one might describe as being for the current account rather than the capital account.
British financial institutions should be encouraged, or even enabled by official intervention to quote firm forward rates for buyers and sellers of the major currencies for the benefit of those traders who do not care to depend on the free market for such a service and are willing to produce evidence that their needs arise from current transactions.
The Bank of England might be willing to act as the buyer and seller of currencies of last resort for current transactions, that is, the lower tier of the two-tier market, quoting rates on either side of a central parity which would of course be fixed but adjustable in accordance with the compromise formula. If the Bank of England were to offer this service which I envisage need not be obligatory but merely optional, it would be doing for foreign exchange risks only what the Export Credit Guarantee Department has done over many years for payment risks in foreign exchange.
Finally, I would urge the Chancellor to realise that other Community countries would welcome a lead from London, based on our very long experience as a world financial centre, and also making use of the great facilities of the London market, which exist nowhere else in the Community. It is not necessary for us to adopt the attitude, as perhaps we have appeared to do in recent months, of leaving the other Community countries to make the running, while we aim to follow along as best we can.
It is a great pleasure and privilege to follow two such eloquent speeches as those of my hon. Friends the Members for Kensington, South (Sir B. Rhys Williams) and Horn-castle (Mr. Tapsell).
In joining this rather select seminar on the international monetary situation, I must disclaim any very close acquaintance with the working of the currency markets. But even a superficial study of the international monetary scene over the last five or 10 years must lead a comparative novice like myself to some general conclusions, which I hope I may offer to the House.
We are now experiencing a break-up of what I would call the Bretton Woods scene. We are faced, therefore, with two major problems and many minor ones. The first, of course, is the creation and regulation of international liquidity, on which my hon. Friend has just touched and which I do not propose to investigate. The second is the question whether we should have fixed or floating exchange rates.
Fixed rates may have been possible in what I have described as the Bretton Woods era, when we had one predominant economy, that of the United States, and the countries of Europe were primarily, indeed overwhelmingly, concerned with restructuring their own economies. I venture to doubt, however, whether it is possible to perpetuate that kind of situation. A system of fixed rates in a sophisticated market is really an attempt to buy short-term stability, at great cost. It is an attempt to limit market prccesses by Government intervention.
I say "at great cost" because, of course, there is first of all the political trauma which, at any rate up to now, appears to have been inseparable from any change by a major power in its exchange rate. We witnessed a hangover from that in today's debate when the right hon. Member for Leeds, East (Mr. Healey) described the floating down of the pound as a defeat.
This of course is an echo of the Labour Government's attitude in 1967——
Indeed not. The Prime Minister has never described the floating down of the pound as a defeat. If he did describe the devaluation in 1967 as a defeat, it is because, as I have said on another occasion, all the efforts and expertise, such as they were, and the prestige, if indeed it had any, of the Labour Government, had been bent for three years to maintaining the particular rate of 2·80 dollars to the pound, and they signally failed. I am not blaming them, but this is a statement of fact, so it was right to describe that as a defeat. This Government have not bent their prestige, their expertise or their skill to maintaining any one rate.
I am not over-concerned with the published pronouncements of my right hon. Friend the Chancellor. I am more concerned with the play of market forces. I do not believe that any rate can be, must be or should be sacrosanct. That is ridiculous. That is to misunderstand the currency market. To try to involve national prestige with a rate is a naive, almost puerile, approach to these problems. The hon. Gentleman demonstrates so clearly that he, too, has not worked out of his system this feeling that national prestige is bound up with any particular exchange rate. He, too, demonstrates why it is necessary to get away from fixed exchange rates. The second reason is that there is nearly always a massive expenditure of national reserves in maintaining, beyond a reasonable point, an unrealistic exchange rate.
So one asks oneself, how is it that the Bretton Woods pattern has come to break up? Hon. Members on both sides have identified various factors. There is the Euro-dollar market, which some people have defined as a field for speculators. It always surprises me how hon. Members on the Opposition side, who presumably have a great deal of sophistication in these matters, call the movements of funds by companies, which are bound to protect their balances, "speculation" as though it had some sinister import.
Other people have identified the international corporations. As my hon. Friend the Member for Horncastle has so perceptively observed, hon. Members opposite are always seeking for some sinister, almost hidden, influence which operates against a country's interests in this market. In times past it was the international financier, or the gnomes of Zurich. Now it is the international corporation. As has been observed, in the next generation it will no doubt be the sheikhs of the Persian Gulf. I identify these not as sinister influences but as new factors which we must take into account.
It is perhaps those factors, which we have not sufficiently estimated up to now, which have compelled the departure from a system of fixed exchange rates. It has been demonstrated very clearly that it is impossible for a country to maintain an overvalued or an undervalued currency. The process is painful and expensive. The truth is that we are still, all of us, trying to operate national monetary systems in an increasingly sophisticated and close-knit world market and it is no longer possible to reproduce the wizardry of Dr. Schacht. It may have been possible in the 1930s but is no longer possible now.
So why go to such lengths to maintain fixed exchange rates, which all the experience of the past 10 years has demonstrated to be an impossible and not very worthwhile exercise? My right hon. Friend the Member for Barnet (Mr. Maudling), whose great experience in these matters one recognises, identified the distortions which result from movements of capital. I should have thought that that might be an argument for imposing controls on movement of capital—perhaps a two-tier system—but that it is not really an argument against a floating rate.
Then there is the question of the volume of world trade. First there is the technical point, which my hon. Friend the Member for Kensington, South raised, as to how far the forward exchange market can cope with the demands of business in a situation of floating rates. It may have rusted away to some degree with disuse but I hope that if the pound keeps floating it will reacquire its expertise of past years. But recognising that that is not the ultimate solution, what those in the business community are asking is that the Government, rather than they, should carry the risk—in other words, that the Government should carry the exchange risks at a cost to our national reserves, rather than the businessmen involved in the problems of export and import. I do not find that a very compelling reason.
Again, it is suggested that if we move away from a system of fixed rates we shall be encouraging the formation of trading blocs. To me this is not a self-evident proposition. It must be a matter of political judgment and, indeed, of international negotiation and skill.
It has also been suggested that a fixed exchange rate is a kind of economic discipline to which we must submit. But this is a fallacious approach. The true discipline is produced by the wish to avoid the patent disadvantages of continuing inflation. It is not the movement of the exchange rates but the underlying economic factors which lead to alterations which impose a discipline on our finance Ministers.
Leaving aside these general considerations, there are the considerations peculiar to this country at the moment. I refer particularly to our membership of the Common Market. There is the common agricultural policy. To me this is not an overwhelming factor. Floating rates may make it more difficult to operate this, I recognise, but it cannot be right to perpetuate a faulty monetary system purely to maintain the CAP.
More significant and more long-term is the objective which we must set ourselves to harmonise, and eventually unify, the currencies of the Common Market. The Werner Report was a little in advance of its time and so were the objectives set by the Finance Ministers of the Common Market. My right hon. Friend the Member for Barnet has stressed the institutional difficulties and the mechanical adjustments we must attempt before we can possibly have a common European currency. I would stress that we must go a great deal further in harmonising our economic and fiscal policies before we can hope to achieve a unified currency in the Common Market.
That is not to say that it is not an objective that we must set ourselves. Indeed, if the Common Market is to achieve real economic substance and unity, we must aim for a unified currency. But so, ultimately, must we aim for some kind of world order and currency. We cannot attempt to build a common currency until we have laid the fiscal and economic groundwork.
I welcome and applaud the bold move made by my right hon. Friend the Chanccellor last summer. I hope that he will not be overborne to refix the sterling rate too soon, if at all. The problems facing the present Government are twofold. First, there is the question, as it is described—lapsing into the horrible jargon of these matters—of clean and dirty floating. This is primarily a matter of liberating international trade.
One identifies the particular position of the Japanese not in any critical spirit. One recognises, perhaps, the special factors that have led to their position. But we all recognise that they have operated an unduly restrictive economy which has not enabled other countries to achieve a satisfactory balance with them. I put it no higher than that.
But this exemplifies the problem, which we must all study in greater depth, which is inseparable from the question of the international monetary situation. Beyond that we may have to investigate the possibility of two-tier markets. In that connection I touch on our exchange control regulations and make a special plea to my hon. Friend the Minister of State to take a further and closer look at them. They are an unattractive aftermath of the war which we have endured for too long. We have endured them because first, until recently they did not preclude the export of capital to the sterling area but with the contraction of the sterling area they have become extremely onerous. Secondly, they have been administered in a reasonable spirit by the Bank of England, to which I pay tribute. But they are a fundamental restriction on liberties that we should all enjoy. Beyond that, they have the practical disadvantage that they positively discourage people from bringing their capital into Britain because of the difficulty of re-exporting it. So without going further into that question and without expecting a very illuminating reply from my hon. Friend, I hope that he will bear in mind my comments and take the opportunity of the next months to have a further look at our Exchange Control Act and the way it is implemented.
In conclusion, I think that my right hon. Friend the Chancellor was absolutely right to float the pound last summer. I hope that he will not be over-pressed to fix the rate again, certainly not in the next year or so. I hope that his example will encourage other Finance Ministers to take the same step, because ultimately it is the sanest way in which to operate our national currencies.
This debate is on a motion that we adjourn rather than on a motion tabled by either the Government or the Opposition. When we first approached the debate I confess that I had some doubts about whether it would be sufficiently sharply focussed to make a worthwhile contribution to examining the current international monetary situation and the problems that have been canvassed from both sides of the House.
During the last few hours, I have concluded that the debate has been very worthwhile, perhaps simply because we have not been debating a motion which too sharply focused our minds. Right hon. and hon. Members on both sides of the House, including the right hon. Member for Barnet (Mr. Maudling), with his great experience, the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) and some of my hon. Friends, notably my hon. Friend the Member for West Lothian (Mr. Dalyell) have opened their minds in a relaxed way in speaking about these problems more frankly, perhaps, and more interestingly than they would have done when arguing the straight pros and cons on a particular motion.
Two quite strong currents of opinion have emerged which I doubt would have been found had this debate taken place a year or two ago. One current is obviously the movement of opinion, on both sides of the House, in favour of floating the pound. We know that people hedge their approval of the present floating of the pound with various reservations. Nevertheless, there is a general sense, which may be misplaced, of some satisfaction at the floating. Not that the Chancellor has chosen to float. That would be a slightly absurd tribute to pay to the right hon. Gentleman. The hon. and learned Member for Dover (Mr. Peter Rees) paid him that tribute but, as we all know, the Chancellor had no choice in the matter. Floating was forced upon him last June, and he gave way to the pressures. Let us get the picture right.
I paid the tribute to my right hon. Friend the Chancellor only because it was not a response which the then Chancellor of the Exchequer felt able to make in 1967. Obviously there were two options open to the right hon. Member for Cardiff, South-East (Mr. Callaghan) in 1967. He possibly made the wrong choice. For that reason it is possible to congratulate my right hon. Friend.
These things are arguable. But in the last five or six years we have moved into a rather different international background of behaviour in the matter of parities and currencies. What may have been possible at one period may not have been possible at another. The speeches today have revealed a greater receptivity to not only the fact of floating but also the idea of continuing to float. This would not have been found in any previous year had we had such a debate.
The other current opinion I have noted is the growing sense of concern at the nature of the commitment towards an economic and monetary union in Western Europe. Once again, that has been reflected in the speeches, particularly those from the Government side of the House. I can only welcome this awareness.
I do not make many claims for myself, but I was probably one of the first to become seriously involved in the Werner Report and the discussions and content of that report, which was written only in June 1970. Nevertheless, I have always taken the view that the Werner Report was, as some of its more enthusiastic admirers described it, the second Rome treaty. It carried forward the horizons of European unity and made them incomparably wider than they had been previously. It also opened up new commitments and requirements for the principal countries, some of which are very relevant to this debate.
Before I attempt to draw conclusions from the experience, the great upset, the great upheaval and the great storm that overtook the currency market and, above all, the dollar a fortnight ago, I want to deal with what appear to me to be one or two important features of this most recent upheaval. The first feature is that it is the third great currency storm that has hit the Western world in the last two years. There seems to be no question but that the frequency of occurrence of these great currency upheavals has increased. Whereas after great currency storms in the past one could look forward to substantial periods of peace and relative calm, it appears that we are now entering a period in which such rest is not permitted, and instead of having a long period in which to reflect upon the unpleasant and disturbing experience, we are no sooner out of one crisis than we are beginning to be concerned about when the next will occur.
Looking back simply over the last two years—and our political memories can go back further than that—we can recall in August 1971 the flight against the dollar leading to the Smithsonian Agreement, and we all remember President Nixon's words, somewhat eulogistic and euphoric, when he described it as the greatest, the most important and the most permanent currency settlement in the history of the world. Yet here we are 14 months after the Smithsonian Agreement with the dollar devalued again and more drastically.
In the interim between these two events which swept the dollar from its old parity there was a storm which afflicted sterling and following that the floating of the pound. We therefore have to take account of the fact that these currency storms—the instability of the system—appear to be increasing greatly. I should not like to prophesy—it is a dangerous thing to do—but I am sure that it is in the Chancellor of the Exchequer's mind and in the minds of those in other countries who are concerned with these affairs that there is not perhaps all that much time in which to repair the breaches in the international currency system.
The second feature to which I must draw attention—and the right hon. Member for Barnet emphasised this aspect—is the increase in the tempo of the gale force of currency speculation. I am not using the word particularly pejoratively at the moment. I am just seeking the correct word to describe it. The right hon. Gentleman referred to the time when he was at the Treasury and he spoke of £20 million a day moving out of the reserves as being a cause of great concern. I am sure that at the time that his successors in the Labour Government were at the Treasury, £20 million would not have been regarded as an extraordinary figure. I imagine that in the last two years the figure has increased possibly even more—and that appears to be the general experience of countries.
The overwhelming reason for it is, as I understand it, a quite phenomenal growth in world liquidity and in the amount of money which is available and which can be used and moved quickly from one currency into another, and the phenomenal growth, in particular, of the Euro-dollar market, which appears now to have the most enormous sums of easily mobilisable capital which can be tapped for any purpose by those who either fear for the stability of a particular currency or who are, frankly, simply concerned with speculation. The third observable and obvious point to make is that the international currency system we have known since the end of the war is now coming to an end.
I have before me a speech by the Prime Minister on 14th February to the American Chamber of Commerce when he said:
The Bretton Woods system predicted a dollar which was as good as gold: a dollar which would be universally accepted as a standard and as a store of international value, because it was convertible into gold, and because it was backed by the overwhelming and unchallengeable strength of the American economy. Twenty-five years later these assumptions no longer apply. The strength of the American economy, though still very great, is no longer so pre-eminent. The dollar is no longer convertible.
I use his words not because he is saying something particularly new, but he makes the point with clarity and brevity.
Of course some may regret the passing, as it were, of the Bretton Woods system. Others may reflect, as I do, that there was within it, quite apart from various instabilities to which I have already referred, one basic defect. There was no self-correcting mechanism within the system that forced upon countries who were in continual surplus changes in economic policy so that they would come more into balance. There were always stresses and pressures on the deficit countries for them to adjust, but on the surplus currencies and surplus nations there was none.
No one who has looked at the experience, certainly of Germany in the early 1960s, although not so much in the last two or three years, or of Japan in recent years—and I say this without wishing to single out these nations for special rebuke—can deny that the surpluses these nations have run over a period of years have been far too great for the health of the international currency and trading system.
I have before me the Japanese current balance over recent years. I know that Japan's trade surplus is far greater than its surplus on current balance because it is offset by the nation's deficit on invisible transactions. But in 1968 it was running a current balance surplus of more than 1,000 million dollars. In 1969 it was over 2,000 million dollars, in 1970 just under 2,000 million dollars and in 1971 nearly 6,000 million dollars. I have not seen the figure for 1972 but I believe that it will be of the same order of magnitude. This makes tremendous demands on the other nations with whom Japan has been trading. The Japanese surplus against the United States in particular was one of the reasons that the United States was driven to the action of devaluing the dollar a fortnight ago.
So I draw the conclusion, from what I have described so far—if the correct conclusion—that because we have not ourselves as yet, for largely fortuitous reasons, because the pound has been floating through this present storm, felt the full blast, we should not conclude somehow that all is well or that we have plenty of time or that matters will be put right. That would be quite wrong. There are considerable dangers.
We must bend every effort to bring about the required reforms in the international monetary system. I do not pretend that that will be easy to achieve. I noted what the Chancellor said this afternoon. Many of us have followed the discussions going on in the Committee of Twenty as best we could. We have only to consider the range of matters that need to be solved to realise that agreements cannot be arrived at quickly.
I identify the problems briefly as follows. There is obviously the question of the new régime if we are to have an international system of fixed but adjustable parities. We must agree with others about what rules there should be affecting exchange rates and their alteration.
We must also deal with the whole problem of what the major new reserve asset will be now that people do not wish to go on holding dollars in anything like the same quantities as they have throughout the post-war period. Associated with that is the question of what has been described as the dollar overhang, which is now of staggering proportions.
It is important to remember that we cannot envisage any serious and successful negotiations between all the countries concerned, and particularly with the United States, on the currency and monetary questions involved without at the same time settling what the United States feels to be the serious deficiencies in the world trading system. We should be wrong to ignore the problems that the United States feels that it faces, and to some extent genuinely faces, and has faced, in international trade.
With all its defects, the post-war one-world system has given the world a longer period of expansion in trade and prosperity than any period since the industrial revolution began. The United States sees that that world which was based upon the achievement of a nondiscriminatory one-world trade system is beginning to change as the European Community has been formed, for reasons that I shall not go into now but which are peculiar to Western Europe. Its regional influence has spread out into a large part of Africa and the Mediterranean area, and now the free-trade group of countries in Northern Europe has joined it as well.
Although a separate regional trading bloc based on Western Europe has not yet taken shape, has not yet raised high trade walls—on the contrary, the trade walls of both Europe and America have fallen in recent years—there is a fear, a threat. It works both ways. The more people talk about it and worry about what the others will do, the greater the danger of protectionism being pursued by Europe or the United States. That is to be avoided.
As my right hon. Friend the Member for Leeds, East (Mr. Healey) wisely said, we must envisage a joint approach to these problems. We must negotiate a sensible world trade arrangement with the Americans, which cannot exclude agriculture as well as industry, and the reform of the currency system that is so clearly needed. That is an agenda that is difficult enough without any extraneous additional complications, but unhappily we now have just such an additional complication, which arises directly from the attempt to form in Western Europe an economic and monetary union, which in many ways stands in the way of the kind of negotiations and approaches that we need to make in the interests of a world system that is so much more important.
The Chancellor gave us today his account of what happened during the last dollar crisis. He told us about the talks he had with European finance ministers. He did not make the point, which virtually everyone else has made, that the European Community as a community was unable to find any solution to the problems. It could not arrive at a joint position. The Chancellor has been in the odd position of being rebuked in the European Assembly by his hon. Friend the Member for Saffron Walden (Mr. Kirk), who leads the Conservative delegation there, for having got together with France and Germany and not having behaved like a good Community man in that he did not bring in the Belgians, the Italians and so on.
I rather sympathise with the Chancellor in that matter. I can see the difficulties that would have been involved. But the plain truth is that whether the Chancellor met only two other finance ministers, or had the Commission breathing down his neck and the full panoply of finance ministers present, it would not have made a great deal of difference, because a common European policy could not be agreed. In a sense it was not necessary, because the Americans devalued and the Japanese agreed to float.
What disturbed me a great deal in the right hon. Gentleman's account of what happened was the various alternatives that were presented before the Americans resolved the crisis by devaluing. We must examine the alternatives that were placed on the agenda, because if a further storm should shake the currency systems of the Western world, I have no doubt that similar proposals will again be considered.
The Chancellor told us that there were three main possibilities. One was that the deutschemark should be unilaterally floated. When it is in balance, that may not be the right solution. But when it happened three years ago it was right for it to float up. What I fear very much is that the main reason why the Germans resisted and the French agreed that they should not float up was not that the Germans felt that their currency was perfectly fixed in relation to the dollar or other European currencies but that they felt that they would be breaking the common ranks of Europe if they acted unilaterally. That is a dangerous situation, because the conditions of stability do not yet exist because the economic systems of the different countries are not such as to enable them to have joint policies.
The other possibility that was discussed was of a joint float. That was a much more important and dangerous proposal. The real danger of a joint float is that it implies that we must peg the pound in relation to the other currencies of Europe. That would then, of course, have been possible as a group, but with their relationships to each other fixed to float up against the dollar.
But that would have implied an end to our floating, and I do not believe that that would be in the interests of this country, and nor is it likely to be for a considerable time. Therefore, the news that the Chancellor is considering the technical and other problems which would arise does not please me a great deal, and I shall urge him at any rate to consider not just the technical feasibility but also the effect on the country and our resources if we were pegged and if a further storm swept across the world currency scene.
I come to a point of some importance. The Government have had an unhappy experience of economic and monetary union so far. The right hon. Gentleman had the experience of being a member of stage one before he was driven to float, but during that time, on his own account, £1,000 million of our reserves left the country in a single week. This experience of economic and monetary union has not been happy in keeping the snake in the tunnel.
What worries me in particular is the right hon. Gentleman's statement, made with colleagues in Europe a few days ago. Far from drawing the modest lesson that this was a rather dangerous affair altogether and a matter to be proceeded with very slowly, as the right hon. Member for Barnet said, the Chancellor and his colleagues said that they were going to accelerate the process, that they would bring matters to a conclusion on stage one at an even earlier date than originally intended.
That brings me to the whole question of the monetary fund which I understand is going now before the Council of Ministers for approval. It is a decision to set up a European monetary co-operation fund. It is already in draft and is up for approval in March. It is due to be operated not later than 1st April. It is as near as that. We have not heard much about it yet.
My concern about it is that the fund is directly related to the efforts to maintain the snake in the tunnel, and we shall be contributing to the fund. The false hope is that, with a little help in short-term funds from European countries as well, we shall be persuaded to enter the tunnel and try to keep the pound there in spite of the losses which, in my view, we shall almost certainly sustain. If I have misunderstood the purpose of the fund I shall he happy to give way for the right hon. Gentleman to explain.
I cannot take as lightly as some have the Government's published statements about economic and monetary union. There has been a tendency for people to say, "The Chancellor does not mean what he says", or, "The Prime Minister is only bluffing and cannot really mean it." That is not a satisfactory or creditable position even if true. But even as recently as the summit conference last October, the Prime Minister made to the House a specific and 100 per cent. reaffirmation of the goals of economic and monetary union, including, as my right hon. Friend pointed out, full union by 1980. If anyone has any doubt on that they should read the statement again. Talking about the hopes of the Heads of Government, he said:
They decided to institute before 1st April 1973, by solemn instrument, based on the EEC Treaty, a European Monetary Co-operation Fund which will be administered by the Committees of Governors of Central Banks within the context of general guide lines on economic policy laid down by the Council of Ministers. In an initial phase the Fund will operate on the following bases:—
Concerted action among the Central Banks for the purpose of narrowing the margins of fluctuations between their currencies;
—the multilateralisation of positions resulting from interventions in Community currencies and the multilateralisation of intra-Community settlements;
—the use for this purpose of European monetary unit of account;"—[OFFICIAL REPORT, 23rd October 1972, Vol. 843, c. 809.]
I put this question directly to the Minister of State: am I right in believing that this timetable is still being adhered to? Do the Government intend to agree with the Council of Ministers that this Fund shall be established as from 1st
April? Do they agree that its purpose will be to support the narrow margins of our currency against theirs and can he tell us how much money has been set aside, or will be set aside, for this purpose? What will be the terms of the settlement between the various nations concerned in the periodic settlement dates?
My second question is also of considerable importance. The formula which the Chancellor and the Prime Minister have used in trying to defend their objective in this area of relationships with the currencies of Western Europe has involved talk about fixed but adjustable rates. If words have their proper meaning that can only mean that the Government do intend to bring floating to an end as soon as possible. That is what they have said. I hope that they have got their tongue in their cheek and that they will take account of all the circumstances, including the very recent one of the great currency storm a fortnight ago. If that has taught them anything, it should have taught them that it would be irresponsible and dangerous for Britain to peg in anything like the conditions we face today and in any circumstances that fall short of a considerable reform of an international monetary system which gave rise to these disturbances of which the floating of the pound is but one necessary consequence.
My last point dealing with fixed and adjustable rates is this. Even if that should turn out to be a medium-term rather than short-term purpose of the Government's policy for European currencies, let there be no doubt that "fixed and adjustable" means something very different from and falling short of the commitment to a permanent and irrevocable fixing of all parities which is the stated aim of an economic and monetary union, to be achieved not later than 1980, specifically and categorically re-affirmed by the Prime Minister at the Summit meeting of 23rd October.
Let the Minister of State tell us what is the Government's real aim. Are they seriously attempting to work for economic union and irreversible parities or a common currency which is the other stated objective by 1980, or are they working for this much shorter-term and much more modest objective of fixed and adjustable exchange rates, to which they frequently refer?
Our advice to the Government is that in present circumstances, they should continue to float. They should turn their attention far more to the problems of reforming the difficult trade and currency situations which exist in the world's economic system and see to it that the commitment into which they have entered of economic and monetary union does not stand in the way of those reforms. As far as they can, they should disengage themselves from this commitment for which no one in Europe can seriously wish, other than the tiny minority of committed Federalists there.
I think the whole House—perhaps "the whole House" is not quite the appropriate expression, but those hon. Members present—will agree that this has been an excellent debate. I think that very often the thinnest attendances provide the best debates, and that has been the case today. Hon. Members on both sides have put forward very interesting and well-informed views on this difficult but vitally important subject. As my hon. and learned Friend the Member for Dover (Mr. Peter Rees) said, it has been a select seminar.
It was marred just a little I thought—I mention this only in passing—and only momentarily in the speech by the right hon. Member for Leeds, East (Mr. Healey) who started on a little Budget debate of his own, referring to rent increases, land prices, unification, threshold agreements and the rest. The comment I make in passing is that the only sad aspect of the sort of remarks which the right hon. Gentleman makes across the Floor of the House on these occasions is that he appears to have an inner compulsion to hunt around for the worst possible nuggets of gloom, grief and misery even if he can find them only in the pages of the Telegraph, as he did on this occasion.
I also felt that the right hon. Member for Stepney (Mr. Shore) was less than generous—I do not put it more strongly—when he referred briefly to the events which led up to the floating of sterling. We cannot entirely forget that both of those right hon. Gentlemen were mem- bers of a Cabinet which abandoned nearly every one of their policy objectives to uphold the principle of fixed rates. I appreciate that we have moved on since then, but this is someting we cannot entirely forget when we receive the advice which the right hon. Member for Stepney has given to us tonight.
Would the hon. Gentleman assure us that he does not either forget the way in which the right hon. Member for Bexley (Mr. Heath), who I think is now leader of his Government and party, handled the political, moral and economic aspects of the decision at that time?
I come first to the main issue which has been discussed today, the question of fixed versus floating rates. I am expressing this in the broadest terms. We have heard diverse views on both sides of the House about the respective merits of each. The hon. Member for West Lothian (Mr. Dalyell), I believe, said that we were all floaters now, or something of the sort, but this has not been demonstrated in the debate. For instance, we heard a very good case for floating presented by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), but the case against was well argued by the hon. Member for Ashton-under-Lyne (Mr. Sheldon). My right hon. Friend the Member for Barnet (Mr. Maudling) judged that fixed parities were in general preferable but that floating could be advantageous for particular currencies from time to time.
For my part, I should say that the majority of Governments throughout the world which have actually to take responsibility for these matters believe that a system of fixed parities, although of course with provision for changes when a country's costs and prices are out of line, is the right one for the world monetary order. They include the Governments of less developed countries whose interest in international monetary stability, as I am sure the House will agree, is no less important than that of the countries of the European Economic Community.
As hon. Members have said, a floating rate can provide an automatic mechanism for countering speculative or other short-term capital movements although at the price of movements in the exchange rate which may be unwelcome from the point of view of trade and genuine investment. With fixed parities other arrangements are necessary.
One such arrangement is that, where a change in the exchange rate is justified by the emergence of a basic disequilibrium, the change should be made promptly before large speculative pressures can build up. But this does not deal with the situation in which there is no basic disequilibrium, as there was not with the deutschemark, and an exchange rate change would be inappropriate; or the much more difficult situation in which the underlying position is not as clear as the judgment or the fashion of the market might suggest.
There can be no simple or single answer to the problem. It is clearly important that the size of reserves and the scope for change in them should be adequate to provide defences against large-scale temporary movements. Movement within margins or adjustments of interest rates can be used to correct or moderate movements stimulated by arbitrage or similar considerations. There is need also, as EEC countries have explicitly recognised in a resolution last year and in the practice of many of them individually, for measures of control which, without disrupting normal trade and investment, will prevent or reduce short-term capital transfers and protect the domestic monetary situation from the effects which it might otherwise suffer.
We must not forget, however, that there has been an unusual background to the massive movement of funds of recent years. My right hon. Friend the Member for Barnet referred to this. The balance of payments of the country with the world's leading currency, the United States, has moved into very considerable disequilibrium following a long period during which, as far as the market was concerned, the primacy of the dollar was barely questioned. My right hon. Friend referred to the time when he was at the Treasury, when this disequilibrium had not yet shown itself. Until this situation is resolved, and the United States balance of payments moves back into equilibrium, the problems of capital movements and of adjustments of exchange rates are bound to present acute difficulty. The achievement of a reformed and more stable system towards which the Committee of Twenty is working must provide a framework, within which some of these problems become more manageable. The adjustment process is one to which that committee is currently giving a great deal of attention. The adjustment process arrangements must strike a fair balance between the claims of stability and the need for flexibility. I think there would be wide agreement that these arrangements should be symmetrical in the sense that surplus countries should be as ready to adjust as are deficit countries.
There is also increasing recognition of the part to be played by objective indicators, although there are no doubt a number of problems which might arise. The argument of the right hon. Member for Leeds, East about speculation against an indicator is an interesting one which is very relevant to these considerations.
From what I have said, it will be clear that the consideration that has taken place in the Committee of Twenty, pointing the way to a strengthening of procedures which will bring to bear the collective expertise and authority of the international financial community on the resolution of these questions, whilst respecting the need for maximum practical freedom of action for individual nations, is vital.
My right hon. Friend the Chancellor mentioned two-tier markets, and they have been referred to several times in the debate. For the sake of moving on, I will not again go over the arguments for and against two-tier markets.
My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) expressed concern about the role of the Euro-dollar market in the recent disturbances. I think it must be generally accepted that the Euro-dollar market, although it provides effective machinery for the movement of capital, does not cause these movements. The motivations of those who are protecting the value of the funds under their care or at their disposal is what matters fundamentally. These are not so much speculative movements—although that was the term used by the right hon. Member for Leeds, East—as the natural consequences of growing trade and the growth of international companies. Therefore, a plea for controls on the Euro-dollar market is not the best response to recent events. What is needed fundamentally is to achieve a reformed international monetary system as the background to a better working of the adjustment process.
The right hon. Member for Leeds, East asked about sterling guarantees which he referred to as the Basle agreements. The sterling agreements will remain in force until September next. The guarantee clause, under which the bulk of sterling holdings covered by the agreements were guaranteed at 2·40 dollars, is in process of being implemented and a sum of £33 million has so far been paid over in respect of that implementation. We are in the process of discussing with the sterling agreement countries the way in which the guarantees should continue in operation while sterling is floating, but these talks are not complete. The future of the agreements after September is another question which we shall begin to discuss in the period ahead.
The hon. Gentleman knows that we have had correspondence on this subject. Can he say whether it will be part of the Government's purpose during these negotiations to ensure that, as a result of sterling having gone above the trigger point that has produced this payment on our account, we can get a refund?
I believe I told the hon. Gentleman at Question Time that many countries were involved. These are bilateral negotiations which must by their nature be confidential, so all I am able to say at present is that these matters are being considered and discussed now with the sterling agreement countries and we will in due course have to come to some kind of agreement about how we proceed following the first implementation which, as I have already explained, is taking place.
I do not think that such an agreement was entered into by this country but I take note of my hon. Friend's opinion.
The hon. Member for West Lothian referred to the SDR aid link and I intervened. I should, however, say that there have been suggestions—for more or less as long as there has been discussion of a new reserve asset—that its issue should in some way be made to facilitate a transfer of real resources from developed to developing nations, and so to foster economic development. This matter has not yet been considered in the Committee of Twenty discussions. It is on the agenda for the next meeting of Deputies, although a number of possible forms of link have already been considered in the International Monetary Fund. My right hon. Friend the Chancellor set out our general approach to this matter at the IMF meeting last September and I would be delighted to send the hon. Gentleman extracts from what my right hon. Friend said.
I do not think I will go into the question of rates of exchange and domestic prices again since my right hon. Friend covered this point in his opening remarks. I will repeat what he said:
Overall there should be little or no impact on the total of our trade or on the cost of our imports. We may lose in some markets but gain in others and taken together these effects should broadly balance out.
The point has been made that there was a difference between remarks made in a statement yesterday by my right hon. Friend the Minister of Agriculture, Fisheries and Food and the percentage change to which my right lion. Friend the Chancellor referred today. Sterling has depreciated by 5 to 6 per cent. in relation to the EEC agricultural unit of account, a gold-denominated constant, but by 4 per cent. in relation to EEC currencies at present market rates. These amounts are consistent because the EEC currencies have themselves depreciated in relation to the unit of account since 12th February. It is the unit of account relationship which is important for settling arrangements under the CAP. I should explain that these percentages will change frequently.
Since my right hon. Friend spoke this afternoon, I have had a report that at the close of the market today sterling was 3·3 per cent. above the pre-crisis dollar value and 4·3 per cent. below the weighted EEC average. I do not think that hon. Members should be surprised if these percentages change day by day, because exchange rates are fluctuating.
I now come to the main point made by the right hon. Member for Stepney. It was not surprising that he concentrated his speech on economic and monetary union. I think the right hon. Gentleman sought to persuade himself that recent events had in some way hindered progress towards EMU. He also felt that EMU would hinder international monetary reform. The truth is that the determination of the EEC countries to press ahead with moves towards closer union has been increased.
At their meeting on 14th February the Council of Finance Ministers, after a full discussion of the recent currency developments, reaffirmed their determination to press on with the development of EMU and in particular to bring forward the date by which studies are to be made of short-term monetary support facilities within the Community and of reserve pooling. The Government warmly welcome those decisions, but we ought to be clear about what is involved.
The recent disturbances have brought home to the member States of the EEC—if they needed any convincing, which I do not believe they did—that we must, as my right hon. Friend said, press on with the work of international monetary reform which is so urgently necessary, and that entails Europe evolving a common approach to international monetary matters. The development of a European monetary personality is therefore complementary to the work of international monetary reform. Stability in the world system could and should be fostered by the emergence of an integrated, clearly expressed European view, so I do not in any way share the fears expressed by the right hon. Gentleman.
Will the hon. Gentleman accept that what worries us is not that the European countries should try to reach a common view? If they can find a sensible one, good luck to them. What we are concerned about is the commitment to a European monetary union, namely, to establish a single currency, or, at the minimum, fixed, unvarying and unchangeable exchange rates between the various European countries for which the snake in the tunnel agreement, which has so disastrously collapsed in the last few months, was supposed to be the first step. Will the hon. Gentleman address himself to that, because that is what the Chancellor of the Exchequer pledged himself to do along with eight other Ministers of the enlarged Common Market at his meeting with them last week?
I was just about to come to that when the right hon. Gentleman intervened. I assure the right hon. Gentleman that there is no intention of proceeding to EMU precipitately. The intention is to develop the process in well-thought-out stages in which the economic and monetary sides of EMU will be handled in parallel. No question of premature and irreversible locking of exchange rates can arise. The right hon. Member for Stepney knows a great deal about these matters. Of course a return to fixed but adjustable parities—which is the Government's policy—as soon as circumstances permit falls short of a single European currency. I think that that is a statement of the obvious.
The hon. Gentleman has not even attempted to address himself to the problem which I put. Let me again put it to him fairly and squarely. Does he believe—and do the Government believe—that it is possible in less than seven years from tonight for all the members of the enlarged Common Market to have either a single currency or to have established between their various currencies exchange rates which are fixed and immutable? Those are the precise terms of the agreement to which the Prime Minister committed the Government last October and the Chancellor of the Exchequer committed the Government last week.
That is the answer to the question. It was clearly stated in the summit communiqué that economic and monetary union is the Government's objective. If we look to see what is going on now, we see a process of consideration of how we might move to stage two of EMU. That is exactly what is happening in Brussels at present, namely, consideration of the various means by which we might advance to stage two. That does not prevent the objective from being any the less valid.
The right hon. Member for Stepney and also my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) mentioned the European Monetary Cooperation Fund. In terms of the functions which the fund will be called on to perform in its initial phase, I appreciate that my hon. Friend regards this as a mouse because he feels that its objectives are too modest. This criticism has also been made in the European Parliament. The right hon. Member for Stepney takes the opposite view.
It is right, and I confirm, that the European Monetary Co-operation Fund is concerned with the snake-in-the-tunnel scheme and the fund will also take over the existing short-term monetary support arrangements between the central banks of the Communities. Although its initial functions are modest, there is no object in setting up the fund if following its establishment—and I shall come to the date—there is not then further consideration of how it might develop further. It is true that the fund should be established by 1st April in accordance with what the summit decided. It will then be possible to develop it, enlarge it and build it up as we go along.
The House has not been told a great deal about this fund and we do not know its size. Perhaps the Minister can tell us. If the fund had existed a year ago, would it have been of a kind or magnitude—and if it were, would the hon. Gentleman have thought it wise—to have resisted the floating of the pound and the maintenance of the pound as a snake in the tunnel?
It did not exist and that is a hypothetical question. There were arrangements to make settlements under the snake-in-the-tunnel scheme and it is intended that this fund should take over the present arrangements.
The right hon. Member for Stepney asked about the size of the fund and the settlement terms. These matters are not yet decided. I should be happy to give more information to the right hon. Gentleman if I possessed it, but it has not yet been decided.
This debate has concentrated mainly on the direct problems of the international financial community. My right hon. Friend the Chancellor has stressed how in the last few weeks timely international co-operation dealt successfully with a major crisis in international monetary relationships.
Finally, I turn to consider the other essential prerequisite, namely the economic health of the world in its trading relationships, and I wish for a few moments to concentrate on the theme of co-operation. In the post-war era there has been a remarkable growth in the interchange of goods and services among the nations of the non-Communist world. Between 1950 and 1970 world exports increased fivefold in value. It is only by further increasing the amount of international trade that the developed countries can secure continued growth in their domestic economies and maintain a steadily increasing flow of assistance to the developing world. It is essential that the momentum of post-war trade liberalisation should be maintained If it is lost, the inevitable stress on the economic system will encourage a general slide into protectionism. Therefore, this year is a vital one for the growth of world trade through international co-operation.
Like my hon. Friend the Member for Walsall, South, I agree that it is fatal to talk in terms of confrontation and to talk about chauvinism, as the right hon. Gentleman did. Attempts to polarise the situation or to look at any one element in it are not what is needed at the present time.
The enlargement of the European Community has created the opportunity for Europe to establish a new pattern in its relationships with the rest of the world. At the European summit meeting last October this was fully recognised.
In the trade sector the Community reaffirmed its commitment to further progressive liberalisation and it gave a lead on the timing of multilateral trade negotiations. The Community intends to be ready with its approach to these talks by 1st July and has expressed its hope that an effort on the part of all participants in the talks will allow them to be completed in 1975. This is not the language of confrontation.
I am equally convinced that the United States Government fully recognises what is at stake in trade. Of course the size of the United States current account deficit and the impact of Japanese competition encourage protectionism and create a very pressing problem for the United States administration, but the resolution of the monetary crisis should ease this problem. I know that my right hon. Friend welcomes the undertaking to give priority to a Trade Bill in the statement of Mr. Secretary Shultz on 12th February.
The hon. Member for West Lothian referred to the interest equalisation tax, which is a tax imposed on United States citizens or residents purchasing foreign equities and bonds from foreigners. Its purpose is to offset any interest rate attraction to potential borrowers in the New York market. The effect of phasing it out would be to restore access to that market to foreign borrowers, and this can be expected to result in a capital outflow from the United States. The precise effects are difficult to ascertain and would depend on, among other things, relative interest rates in the various financial centres. But I can assure the House that further thought is being given to the consequences of this American decision.
I would like to thank the Minister of State for the trouble he has taken over that answer, and I agree that it cannot be pursued.
If, without ribaldry, I may revert to the question of Japanese public spending, it would seem to some of us that unless there is a rise in Japanese public spending the problem of the yen will be with us for a long time to come. Could it be put seriously to the Japanese that it would be very helpful for the rest of the world's monetary problems if they were to do something about Tokyo Bay and the pollution of Osaka?
Personally I find this an interesting subject, but I think the House is in a mood now for me to come near to the conclusion of my speech. I have been on my feet for 26 minutes and to go into the problems of the pollution of Tokyo Bay would delay things more than the House would wish.
In this debate we have been considering the course of events which led to the decisions announced just over a week ago. We have been considering the pressures that underlay them and the immediate courses of action to which they gave rise. We have been considering the pressures the consequences of those decisions in terms of their short-term economic effects and, more generally, of the development of the Community and the direction of the future reform of the monetary system. These have been major events, and it is surely right that this House should assimilate them and interpret their consequences, although it will be some time, of course, before the exchange markets settle down.
There has been widespread agreement not only in the course of today's debate but in the international community that the solution reached to the immediate disturbances was the right one. It was addressed to the principal problems in the situation—the United States deficit and the Japanese surplus. It was prompt. There is also widespread acceptance of the broad lessons which have emerged—that these questions can be satisfactorily resolved only by international action whether in the field of payments or of trade, and that we should press ahead with this work——
Before the hon. Gentleman sits down, will he address himself to a question which must have come to all our minds when he said that within just over five weeks from now the Government will contribute money to a European monetary fund the purpose of which is to maintain the snake in the tunnel? Can he say whether by that date sterling is intended to be in the tunnel with the other snakes—in other words, that there is to be a repegging of sterling? If not, are we paying this money into the European monetary fund to keep other currencies in the tunnel?
To my knowledge, the right hon. Gentlemen has been told at least five times today what the Government's policy is. We shall return to a fixed parity as soon as circumstances permit——
I have answered the question. I am tempted to quote from speeches made by the right hon. Member for Leeds, East on this very subject. I have quotations ready. It would be a most enlightening exercise. I have, for example, HANSARD of 21st January 1971. On that date the right hon. Gentleman made a speech almost every word of which is in complete contradiction to what he said today. However, I shall not quote it to the House because this has been an extremely friendly debate.
The hon. Gentleman has genuinely misunderstood my right hon. Friend the Member for Leeds, East (Mr. Healey). My right hon. Friend was asking about the uses of the monetary fund which is to be set up and which is to come into operation in five weeks' time. We know the details. My right hon. Friend was asking whether the fund, especially Britain's contribution to it, will he used to help those currencies in the Community which are being held within the narrower bands around their parities.
I thought I had explained that. One of the principal initial purposes of the fund will be to deal with settlements under the snake-in-the-tunnel scheme.
International monetary affairs is a turgid subject to the ordinary man in the street. In his view we appear to live through a succession of crises which do not seem to matter to him very much. Understanding of the issues has not been assisted by the jargon so beloved by experts. The whole topic is complicated enough without making it almost meaningless by a language of its own.
Nevertheless the debate has been an excellent one in every sense, and I am sure that the House has a lot to offer on the subject. In that spirit, although I must not commit my right hon. Friend the Leader of the House, it may be that in the course of the next few years we shall have an opportunity to discuss this interesting subject again.