International Monetary Situation

Part of the debate – in the House of Commons at 12:00 am on 22nd February 1973.

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Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury 12:00 am, 22nd February 1973

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.