I am glad that the hon. Member for Hertford and Stortford (Mr. Wells) exposed some of the fallacies expressed by the right hon. Member for Down, South (Mr. Powell). It is a bit pathetic to see new hon. Members troop in to listen to what they think they might believe if only they had the courage, but to hear a barrage of internal contradictions and fallacies which make them go away disappointed. They should reflect that if petrodollars had not been recycled not only would the bottom have dropped out of the oil market, but the bottom would have dropped out of many other markets and we should now be in an even deeper world slump.
I am glad that the hon. Member for Hertford and Stortford talked about the problem of the international coordination of monetary policy. I hope that he will read the second special report from the Treasury and Civil Service Committee.
I congratulate the Economic Secretary. I hope that he will not be deterred by his junior ministerial office from thinking independently about policies. The present Chancellor was not when he held junior office and I am sure that the results in the hon. Gentleman's case will be more constructive than they were in that of his right hon. Friend.
The Economic Secretary acknowledged what the Committee said about the banking crisis. I was a member of that Committee. I pay tribute to the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) specifically. At an early stage he insisted on the importance of the banking crisis as a major dimension in the general international monetary inquiry on which we had embarked.
The problem of the Opposition's reasoned amendment is broader than the terms in which it is posed. It can be met more fundamentally in the specific case of Argentina by avoiding the Fortress Falklands policy and by attaching conditions, not to the short-term IMF loan which causes a forest of problems, but to the refinancing of those loans as bonds to which proper conditions can be attached on the lines that we recommend in our report. There are dangers in an over-politicisation of conditionality. I am not sure that in 1976 we would have enjoyed an even stronger dose of conditions. I do not rule out in future the proper resort by Britain to IMF resources, free of conditions which are too burdensome.
The origins of the banking crisis were in the problems of recycling the OPEC surplus. The enthusiasm with which that recycling was undertaken is worth remembering. The debtor countries needed to borrow. The OPEC countries wanted a way of investing their money in an easily available and liquid form in the private sector. The banks in Britain and the United States were ready to undertake the necessary mediation. In the years 1974 to 1980 that seemed a responsible policy. People did not anticipate the depth of the recession.
The problems affect all debtor countries, not just countries such as Mexico, Brazil and Argentina. If my hon. Friend the Member for Bolsover (Mr. Skinner) were here, he might care to remember that the debt crisis started with Poland. For the same reasons Poland, having embarked on an over-ambitious programme of industrialisation, was thwarted by the collapse of the markets which it anticipated meeting. The funds, whether from the private banks or international institutions, were exhausted and not available for the many credit-worthy industrial developing countries which were never a risky investment. But because the funds were not available and because their own markets had collapsed — an even bigger collapse than we had experienced in manufacturing demand — not only the rich and rapidly developing countries were at stake.
The criticisms in our report refer particularly to the lack of risk assessment by the banks, even in the circumstances of the time. There seemed to have been extraordinary lapses by banks in checking credit worthiness and current indebtedness. Nowadays, when banking advisers go to a country they have to write to possible creditors to ask, "Do you have any debtors in this country?" That is a result of lax supervision in the past.
But the biggest factor, which the Economic Secretary did not mention, was the failure of the developing countries and banks to anticipate the depth of the policy-induced recession. In paragraph 3.8, our report states:
Another respect in which the world economic environment has degenerated since the late 1970s … has been the adoption
of.monetary policies in the advanced industrial countries which have led to high and fluctuating interest rates and to very unstable exchange rates as between the major currencies.
That was not anticipated, nor was it capable of anticipation.
f those errors caused the banking crisis, its cure cannot be found without a resumption of growth and a reversal of those policies. The problems cannot be solved because, first, the borrowing is and will remain short term until there is a resumption of growth and credit worthiness. Secondly, the drying up of the oil surpluses means that funds are not readily available for overseas investment. Thirdly, the debt service, as my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) said, comes near to exceeding the value of exports so that there have already been huge reductions in imports for the most severely affected countries.
The need is not just for refinancing, but for a restructuring of the debt. In paragraph 5.19 of the report, we suggest the lines that that should take. The report states:
the lending should be long term; the real burden of interest payments should not rise unexpectedly or independently of borrowers' ability to pay; and the volume of borrowing should be dependent on the country using the funds to supplement a high level of domestic saving to finance sound investments as well as on the country following prudent macroeconomic policies.
There is a need for long-term bonds to which, properly, much more elaborate conditions can be attached than to short term bank loans. They could be launched by a consortium of developing countries and be partially guaranteed by, for example, the IMF's gold stock—the report makes that suggestion — and subject to the borrowers adapting the sound growth-oriented policy which makes good use of borrowed funds. That is a more healthy context in which to view, not so much the politicisation of IMF conditions as their economic relevance.
The major change needed is the return to monetary policies in the advanced countries which are favourable to growth. Last Thursday, when the Chancellor of the Exchequer announced his mean and damaging cuts, we saw the latest chapter in the development of monetary policies that are inimical to growth. I said then that the measures were "trivial" in relation to the problems involved in maintaining the illusion that the Chancellor has induced in financial markets.
The 5 per cent. reduction in the growth of sterling M3 and other money supply aggregates for which the Chancellor is looking represents about £5 billion off the PSBR. The Chancellor was announcing a £1 billion—or, more realistically, a £½ billion— reduction in the PSBR. It is no wonder that the markets reacted immediately and dismissed the Chancellor's measures as footling. To please Mr. Gordon Pepper in the doctrines in which he has encouraged him, the Chancellor should not only have avoided the cut in interest rates just after the election, but should have increased them and made much larger cuts in public expenditure. That is a consequence of leaving the medium-term financial strategy in place. It leads the market to expect further increases in interest rates. It encourages the investment strike upon which the market has embarked, and out of which it will be brought only by the increase in interest rates for which it is looking.
My right hon. Friend the Member for Bethnal Green and Stepney put the point well on ITV's "News at Ten". He explored the argument underlying what the Chancellor of the Exchequer had done in his medium-term financial strategy. But my right hon. Friend spelt out no alternative rules. One possible approach is beautifully illustrated by Mr. Fforde in the current Bank of England Quarterly Bulletin. He made a revealing remark about the setting of monetary targets. He distinguished between the political economy of money supply strategy, which is concerned with political presentation, and the practical macro-economics of a money supply policy, which is concerned with macro-economic relationships between money supply as an intermediate target and the ultimate objectives of policy regarding prices, output and employment.
Mr. Fforde remarked on the contrast between the political economy and the reality, and said:
it would scarcely have been possible to mount and carry through, over several years and without resort to direct controls of all kinds, so determined a counter-inflationary strategy if it had not been for the initial 'political economy' of the firm monetary target.
It was on that that the presentational confidence was built. He continued:
what matters is the refusal of the authorities to stimulate demand in 'Keynesian' fashion, or to 'reflate', as conditions develop that would in the past have justified and provoked such a response. The fact that the monetary targets have not concurrently been met, or that the meaning of particular developments in this or that aggregate has become very ambiguous, is of much less importance.
Mr. Fforde may believe that, but the markets do not—as they are now showing.
We must move on from the present stage of Government strategy and look for a viable alternative. This is not the occasion on which to embark upon a full-scale examination of our macro-strategy. However, one major aspect of it is of particular concern to the IMF, and we should not allow it to pass in a Bill that makes a major increase in the resources of the IMF.
As the hon. Member for Hertford and Storford said, there is a clear need to take into account the exchange rates, nominal incomes and the final targets in the conduct of monetary policy. The mechanics of how to do so were explored by the Treasury Committee in its report on the exchange rate, and were spelt out both in the chairman's draft and, especially, in mine.
The developments in the exchange rate policy of a single country are not without international repercussions. If one country adopts a managed exchange rate regime, it is a feasible course to follow. Even a bloc, such as the European monetary system, can do so. But if it is successful and other countries follow, the combination of countries can be highly destabilising. Destabilisation can occur quickly if the exchange rate targets aimed at are incompatible, as countries seek incompatible competitive devaluations or revaluations.
The other international agencies, especially OECD, have examined the matter, and like major national agencies such as the Federal Reserve Board in the United States, and the Japanese Economic Planning Agency, have developed the apparatus of linked national economic models. But neither the Treasury nor the IMF has done so. Since we saw the IMF in January, it has taken some steps to examine the interaction of exchange rate regimes of a rather different sort than we have now, but those steps are still rudimentary and far from the policy level. They need to be put firmly at the top of the agenda if the IMF is to justify the increase in resources that we are giving it, and certainly if it is to lead the negotiations needed to set up a more viable long-term solution to the problems of the banking crisis.
If we are not to have a Committee stage, I hope that the Economic Secretary will explain why, in clause 2, we are giving the Treasury carte blanche to commit quite unlimited sums in support of quite unspecified actions by international agencies and central banks. I rather sympathise with the proposal. If we were to set a precedent of requiring legislative endorsements of particular support operations, it could have a most unfortunate effect in Washington if congressional approval were required. It would be better for the Economic Secretary to come clean and say that he is asking for a carte blanche for the Treasury in this extraordinary respect. Perhaps it is a measure, if not of the lap-dog character of the House, at any rate of its trust in an institution that I hope will do rather more to earn that trust than it has done in the recent past.