§ 2.51 p.m.
§ LORD BOOTHBY rose to call attention to the lack of liquid reserves in the Free World, and the consequent effect upon currencies, economic growth, the development of emergent countries, and the volume of international trade; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. I must tell your Lordships that I am at the moment full of penicillin and passion: penicillin on account of a germ that I picked up last week in New York; passion on account of the shortage of liquid reserves in the Free World.
§ It may seem odd to your Lordships that anyone should feel emotional on the subject of liquid reserves of the kind 52 I have in mind, or indeed on the subject of monetary policy; but I have done so throughout my adult life. The reason is that I have always believed that our failure after the 1914–18 war to devise an international monetary system which would meet the requirements of the modern world was the primary cause of most of the evils which have since befallen us, including the Second World War.
§ The tragedy is that we very nearly did it. The Genoa Conference of 1922, in a series of currency resolutions, recommended a conference of central banks of issue, and the subsequent practice of "continuous co-operation" between them. It also recommended a monetary convention based on a gold exchange standard; restriction of the circulation of gold, and a redistribution of gold reserves. Finally, it recommended the regulation of credit, with a view not only to maintaining currencies at par with one another, but also to preventing undue fluctuations in the purchasing power of gold.
§ For these regulations the late Sir Basil Blackett and Sir Ralph Hawtrey were primarily responsible; and they were subsequently described by the late Sir Laming Worthington-Evans as a financial code worthy to rank with the legal code of Justinian. My Lords, the Genoa Conference, alas! crashed to political ruin. This led to the fall of Lloyd George, the assassination of Rathenau, the French occupation of the Ruhr, and the abandonment of the Genoa currency resolutions. All were serious; but perhaps the last was the most serious of all.
§ In 1925 this country returned to an uncontrolled international gold standard at the pre-war parity of exchange. As a boy of 25 I had the temerity to oppose this step in another place. Only four other voices were raised against it: three Conservative, one Liberal—none Labour. In fact, Mr. Snowden was one of its most passionate advocates.
§ LORD PETHICK-LAWRENCE
My Lords, has the noble Lord verified that fact? Because I took a very strong view against it.
§ LORD BOOTHBY
My Lords, I am delighted to hear that. I do not think my noble friend made a speech, because I looked it up; but it may well be so. 53 However, he will not deny that the leading financial pundit of that time in the Labour Party, Mr. Philip Snowden, was strongly in favour of our return to the gold standard. In any case, whoever supported it or opposed it, the consequences were catastrophic. There was inflation in the United States, and deflation in Europe, culminating in the greatest economic collapse known to history. By 1931 the number of unemployed in this country, never less than a million during the 'twenties, had risen to 2 million; and the German unemployed amounted to 6 million. It was upon the backs of these 6 million unemployed that Hitler climbed to power.
In 1945 we had another chance. We did not take it. The theoretical price paid at Bretton Woods for fixed exchanges, and a fixed price for gold, was adequate monetary reserves and adequate liquid reserves for the Free World; and these were not in fact provided. Keynes wanted to provide them in the form of "Bancor". He was brutally defeated by Mr. Harry Dexter White, and died in near despair; but his ideas live on, mercifully for us all. In view of the evidence which has since come to light it is not unreasonable to suppose that Mr. White did what he did with the deliberate objective of wrecking the modern Keynesian conception of controlled international capitalism and monetary management, which is the only effective answer to Communism.
I moved the rejection of the Bretton Woods Agreement in another place, on the grounds that it failed to provide sufficient liquid reserves, and put the whole onus of restoring a balance of payments not upon the creditor nations but upon the debtor nations. I very much regret to say that I was gagged, and that the House of Commons was gagged, in that debate by Dr. Dalton, now the noble Lord, Lord Dalton. We had a debate on the American Loan. We were denied a debate on the Bretton Woods Agreement. Nevertheless, I managed to get nearly 100 Members of Parliament, including some of the Labour Party, into the Lobby against it; and also into the Lobby against the terms on which we had to take the American Loan.
I also managed—and I think it is rather important to go back over the history of the past, because it enables us to see what is wrong with the present 54 —to get in a few words when the Motion for the convertibility of sterling, to which we were committed by the Bretton Woods and the American Loan Agreements, was debated in another place on July 31, 1947. I then said:The agreements we are discussing to-night shackle us more firmly and more relentlessly than ever to the gold standard. In practice, what they do is to make sterling convertible into dollars and therefore into gold. And in so doing, they enormously increase the danger of sudden withdrawals of foreign balances from London…That is what we have been suffering from, of course, during the last few years. I went on:We are now financing the world dollar deficit. This convertibility of sterling is imposing upon us an unbearable burden which we are simply not capable of carrying. We cannot afford to lose dollars at this rate. As long as the holders of sterling were entitled to withdraw their balances only by the purchase of British goods, we had a chance of getting through: now I think we have no chance of getting through. All these arrangements will be very short-lived. They will all fall to the ground, and have to be abandoned…It is sheer, stark insanity, in our present postion, to embark upon this ludicrous course.My Lords, again I regret to say the Labour Government vehemently opposed these views, and Mr. Glenvil Hall, then Financial Secretary to the Treasury, said that he could see not the slightest justification for them. Mr. Benson also said that I was guilty of the grossest exaggeration; that there was no reason why we should not go back to free convertibility at the time. But in fact I was right and they were wrong; for after five frightening weeks, in the course of which the balance of the American Loan was washed away, we were compelled to abandon convertibility. This, in turn, was followed by the enforced devaluation of sterling in 1949, and by an economic collapse in Western Europe, due largely to the rigid arrangements which were made at Bretton Woods, from the consequences of which we were all rescued in the nick of time by Marshall Aid, which has rightly been described as the most unsordid act in history.
§ LORD BOOTHBY
In fact, they did it twice, and not only twice.
So much for the 'forties. During the past decade we have been subjected, and above all this country has been subjected, to what has been widely described as "Stop-and-go" tactics; and to my mind, the reason for them is obvious. Every time we have encouraged economic growth within this country we have run into balance-of-payments difficulties; and nobody should be more aware of that fact than my noble friend Lord Amory, who I am very glad to see is to participate in this debate. I am sure he will agree that the results of this "Stop-and-go" policy have been most unsatisfactory.
In recent years the rate of our industrial investment, and in consequence the increase in our productivity, has been much slower than that of other countries in Western Europe, particularly the Netherlands, West Germany, France and Italy. At present, there is little dynamism in the British economy comparable to that of France, West Germany or Italy. The rate of economic growth in the United States is also considerably below that of France, Italy and West Germany; and until quite recently the steel industry of the United States has been running at about 50 per cent. capacity, at a time when the demand for capital goods in every underdeveloped country in the world has been steadily increasing. The reason for this is surely perfectly simple. The gold reserves available to the Free World are inadequate to support the volume of production and trade which the two major international currencies, the dollar and the pound sterling, have to carry. It is manifestly absurd that a country with the vast natural resources of the United States should be compelled to throttle down economic growth and overseas investment because of a temporary balance-of-payments difficulty.
I have said over and over again that any attempt to increase exports by repressing industrial investment at home is a policy of desperation and madness. 56 Many such attempts have been made in this country by means of what has been called the "credit squeeze". Some of them have been resisted. I cannot quote information which I have been given in confidence, but I can tell your Lordships that some of the "Big Five" joint stock banks have succeeded in resisting pressure by the Treasury and the Bank of England not to grant loans to great engineering firms to enable them to carry on with modernisation, which is essential if we are to be able to hold our own in the modern world. The pressure has been very great. The "Big Five" have often been able to resist it—I could quote at least two cases from my personal knowledge. But the "little 500", of course, are not in such a position to resist such pressure. The result of these "credit squeezes" and high bank rates, to which we have been intermittently subjected during the last ten years, is that the modernisation of British industry has been held up; and that has done a great deal to diminish the efficiency of our economy in relation to that of France and Germany, and indeed of Italy and the Netherlands, all of whose industries have been brought right up to date.
The fact remains that, according to the Report of the United Nations Economic Commission for Europe, which meets in Geneva, we are the only industrial country in the West at the beginning of this year, 1961, where a high increase of the gross national product seems unlikely in the course of the year; and where exports are expected to be "sluggish"— and I quote the word actually used in the Report. Great Britain and the United States have not at present the liquid reserves necessary to maintain the industrial potential of the West at full capacity; to expand world trade; and to develop the emergent countries in Asia, Africa and South America, which I believe to be absolutely essential. The very fact that, in order to prevent more severe restrictive action, the United States have lost some 4 billion dollars in two years proves this. As for us, so long as our own reserves are only 25 per cent. of our overseas liabilities, we must always be living on a knife-edge.
Meanwhile, during the last two or three years, the tenuous liquid resources of the Free World have been drained off to Germany, which is becoming virtually a "Fort Knox" of the '60's—with this 57 difference: that the D-mark is not, like the dollar and the pound, an international currency, so that these reserves are being put to no good use but are, in effect, sterilised. There are not enough aggregate reserves in the Free World anyway.
What is to be done? Various proposals are now being canvassed. The basic and the primary one is an increase in the price of gold. This, of course, would bring immediate, if temporary, alleviation; for, as Sir Frederick Leith-Ross has pointed out, the dollar of 1960 is not the dollar of 1934 and by maintaining an artificial price of gold, you reduce the volume of international liquidity. Gold is the only commodity in the world which was pegged at an artificial price at Bretton Woods: every other commodity has since risen. This argument is very compelling. Nevertheless, I must confess, having been twice to the United States recently, I now believe that the project of raising the price of gold is politically impossible. I think that they simply will not do it. There are good reasons. An increase in the price of gold would be of greatest benefit to the Union of South Africa and the Soviet Union, and we are not particularly anxious to bring especial benefits to either of those countries. There are also other objections which I think are understandable and which, so far as the United States is concerned, are certainly invincible. Therefore, I think that we must turn elsewhere for a solution.
For my part, I believe that an enlargement of the conceptions of Bretton Woods, and the transformation of the International Monetary Fund into an International Central Bank offer by far the best soluton. I am not going into details. They would bore your Lordships, I think; although sometimes when one gets into the middle of them, into their mesh, as it were, they have a fascination of their own. However, they are all there for study, if your Lordships wish to do so. There is Professor Triffin's scheme, a modernised version of Lord Keynes's original proposals at Bretton Woods. There is the suggestion of Mr. Maxwell Stamp for the issue of Fund certificates. There are the proposals of Mr. Bernstein. There is the forgotten scheme, evolved by the Oxford Institute of Statistics during the war, for the automatic use of persistent surpluses of 58 "mature" creditor countries for the economic development of "undeveloped" countries. For your Lordships' sake, I will not go into these schemes to-day. I am concerned more with the growing volume of support for my own views; and this I find extremely encouraging.
The Radcliffe Report, while doubting whether the "scarce currency Clause" (Article VII) of the International Monetary Fund Agreement is workable in practice, saw great merit in the proposal for the transformation of the International Monetary Fund, along the lines originally proposed by the United Kingdom, into an International Central Bank, with its own unit of account, free to accept deposit liabilities or to extend overdraft facilities to the central banks of member countries.
It was my noble friend Lord Monckton of Brenchley, Chairman of the Midland Bank, who said, in his Annual Report to the Bank, that what was required wasa thorough re-examination of the functions and mechanism of the International Monetary Fund".He went on:There remains the deeper question whether the Fund should not itself be remodelled into what might be called a true Central Bank for central banks, equipped like them with powers of credit creation and contraction.Sir Oliver Franks, Chairman of Lloyds Bank, has also advocated the transformation of the I.M.F. into a Central Bank for the Free World. And last, but by no means least, there is President Kennedy, who in his Message to Congress on February 6, 1961, said this:Increasing international monetary reserves will be required to support the ever-growing volume of trade, services and capital movements among the countries of the Free World. Until now the free nations have relied upon increased gold production and continued growth in holdings of dollars and pounds sterling. In the future, it may not always be desirable or appropriate to rely on these sources. We must now, in co-operation with other lending countries, begin to consider ways in which international monetary institutions—especially the International Monetary Fund—can be strengthened and more effectively utilised, both in furnishing needed increases in reserves, and in providing the flexibility required to support a healthy and growing world economy. I am therefore directing that studies to this end be initiated promptly by the Secretary of the Treasury.59 So, my Lords, all the things that I was saying as a rebel, fifteen years ago, are now being said by the Establishment in this country and in the United States. I beg of your Lordships to believe that this is no new experience for me. All I am asking now is: for how long must the Free World suffer from the rigid monetary rules imposed at Bretton Woods? It is becoming increasingly clear that the supply of international liquidity is wholly inadequate; and that un-co-ordinated monetary policies, non-discriminatory multilateral trade, and fixed exchange rates cannot be made to mix. We are shackled—the whole Free World is shackled—by Bretton Woods. That is why our productive capacity is running at much less than it should be, right through the Western World, but above all in this country and the United States; and that is why we are not able to afford to the emergent and under-developed countries of Asia and Africa the assistance that we should be affording to them if we are to save them from Communism. We need a monetary system which is at once more comprehensive and more flexible.
There are two concrete suggestions that I should like to make. The first is that the International Monetary Fund should be instructed at its next meeting to consider ways and means by which more international liquidity can be created, and present holdings of national reserve currencies can be converted into holdings of reserves with international backing. The second is that, thereafter, an International Economic Conference should be summoned to consider a radical reorganisation of the international monetary and payments system, and, indeed, of the whole Bretton Woods setup. I am rather optimistic over this, because the only thing I have ever been able to do in 40 years of public life is to get some conferences and committees set up to consider matters. I have failed in every other respect. But I was the primary mover in getting the Radcliffe Committee set up; I was the primary mover in getting the Wolfenden Committee set up. And now I hope to be, though not perhaps the primary mover, at any rate a mover, in getting this particular International Economic Conference set up. Because, my Lords, I believe that it is of absolutely vital importance.
60 The objectives have been well defined by Dr. Balogh: first, the automatic use of an increasing portion of persistent creditor balances for long-term investment in under-developed areas; and secondly, the gradual transformation of the two Bretton Woods institutions—the Fund and the Bank—into an effective force to stabilise economic growth in the non-Soviet orbit.
Meanwhile, I think that we in this country should consider seriously the possibility of flexible managed exchange rates, which worked well enough after we had been driven off the gold standard in 1931, with the aid of an exchange equalisation fund; and, still more, the necessity of keeping our overseas investments within bounds until a more satisfactory international monetary system has been brought into being. Keynes remains the "Maestro." I was talking to a prominent American economist in New York last week, and he said: "It seems that we all have to read our Keynes at least twice a year". Keynes said:Unless the aggregate of the new investments which individuals are free to make overseas is kept within the amount which our favourable trade balance is capable of looking after, we lose control over the domestic rate of interest.That is what has been happening in this country over the last ten years. So long as we are hamstrung with this system, we must see to it that we do not make overseas investments so much in excess of our favourable balance of payments. Because then, as Keynes said, we lose control, as my noble friend temporarily lost control, over the domestic rate of interest.
My Lords, I have done; I have kept you too long, and I am sorry. But I feel passionately on this subject. believe that it is the most important question that now confronts us. I am sure that the main Communist challenge to our world will be an economic challenge and not a military one, at any rate over the next decade. I am well aware that the Communists are not shackled by Bretton Woods or anything else; and that they have a considerable production of gold which enables them to make credits on easy terms, without conditions, wherever it seems politically desirable to do so. I think that if the problem I have attempted to adumbrate 61 this afternoon is not solved in the pretty near future the Communists may win this struggle, simply owing to our own stupidity: because the problem stares us in the face, and it is by no means impossible of solution. It is with the object of directing your Lordships' attention to this very great problem that I have tabled the Motion. I beg to move for Papers.
§ 3.47 p.m.
§ LORD PETHICK-LAWRENCE
My Lords, I am sure that your Lordships in every part of the House who have listened to the noble Lord, Lord Boothby, will agree with me that we owe him a considerable debt of gratitude for bringing this important question to our notice. We also owe him a great debt of gratitude in that, in the ill-health of which he told us at the beginning of his speech, he has stood up and delivered his fire with his accustomed vitality and vigour and aggressive determination in the face of the opinions of other Members of this House.
I personally owe the noble Lord a particular debt of gratitude, because, knowing that I should probably follow him in this debate, he kindly sent me a few notes of what he was going to say. I am therefore perhaps in a better position than some of your Lordships to follow the trend of his argument and to make some contribution to this debate. I should like to say at the outset that, though I cannot support all the historical facts which he detailed in various parts of his speech, to a considerable extent I agree with his result; and without necessarily concurring in all the points he made, I think that his main object is one that I should entirely support. That I will justify presently, in the course of my speech.
There is no doubt that the noble Lord is perfectly correct in his main diagnosis of the situation to-day. I doubt whether noble Lords who take a different view from my own and that of the noble Lord, Lord Boothby, will dispute the main point that the noble Lord has been trying to make. I noticed in a recent book by a famous economist, Mr. Triffin, under the title Gold and the Dollar Crisis, he uses these words:For a long time the monetary gold stock of the world has been rising much more slowly than the volume of industrial trade.62 That is, I think, the basis of the whole argument which the noble Lord has brought; and I should doubt whether any noble Lord, in any part of the House, whatever view he takes of finance at the present time, would seriously dispute it. That is the question to which we must address ourselves to-day.
If we go back in history, we find that there have been many occasions when the disparity between the growth of production and trade and the growth of our financial resources by which we measure this trade has been considerable. It may surprise many of your Lordships, but in point of fact, although we are accustomed to-day to think of inflation, and to remember that over a long period of time there has been considerable increase in prices, it is nevertheless true (this was brought out by a recent scientific analysis) that there have been considerable periods in history when we have had deflation and a fall in prices rather than a rise in prices.
Without going back into the early centuries I can, of course, remember, as a few of your Lordships perhaps can, the latter half of the nineteenth century in which prices were steadily going down; and there was, in effect, deflation over the whole of that period. It brought considerable problems in those days. In particular, there were vast pools of unemployment at different periods, and considerable economic disasters befell this country. We can all, I suppose, remember —at any rate we know very well—the deflation which was deliberately brought about by monetary means after the First World War. That resulted in the unfortunate position which prevailed in this country in the whole period between the two wars, and which was aggravated—and I am perfectly in agreement with the noble Lord who moved this Motion—by the decision of Mr. Winston. Churchill (as he then was), which he subsequently deprecated himself, when he was over-advised by his advisers to go back to the Gold Standard, I think it was, in 1926.
§ LORD PETHICK-LAWRENCE
It was about that time. That is the position as I see it.
But I should like to draw your Lordships' attention to this further fact. All down history there has been this question 63 of whether the basis of monetary value was adequate to sustain the growth of trade, commerce and exchange generally. There were various events which enabled that to be brought forward. There was the discovery of the gold resources of the world, but there were also the attempts by the banking and financial authorities to meet this shortage of the monetary gold by auxiliary methods of payment. The Bank Act, in the early part of the nineteenth century, was designed to limit the powers of banks to issue auxiliary currency and thereby do this. But the banks in this country, by means of the cheques system, to some extent thwarted the intentions of the Bank Act during those years. In France, on the other hand, where they had no Bank Act, they developed more the use of fiduciary issue in the form of notes. That is one of the differences between the French method of payment and our own in this country.
In America, one of the difficulties (I do not know how far it goes back) of the adequacy of the dollar to meet the payments that are required is due to certain legislative provisions of Congress which impose upon the Government of the United States the necessity of keeping a large amount of gold immobile and unuseful for the purposes of international exchange as a cover for the note issue of the United States. So that in all these three countries there has been a certain amount of resistance in certain quarters to the means by which the financial authorities, the banks and others, have sought to equalise the needs of commercial units of exchange with the trade and commerce of the country.
I agree with the noble Lord that a "new look" is necessary, and I am glad that he suggested an economic international conference. I emphasise the two words "economic" and "international" for this reason: there is too great a feeling among financiers that matters of finance exist for themselves. I have always taken the view that the thing which is really essential to human development and civilisation is not finance but economics. I have always insisted in my mind that finance should always be a servant of economics and not its master; otherwise, for the purposes of the life of human beings, we are being, as Bryan of the United 64 States once said, "Crucified on a cross of gold". That is a very dangerous thing, because we do not live by gold. We do not eat gold and we do not clothe ourselves in gold. We clothe ourselves in physical things; and gold, if it is to be the unit of currency—or whatever takes its place—is the real servant of these economic facts; and if it loses its place in that and seeks to be the master, it is endangering the whole happiness of humanity and the whole basis of our economic life.
I am glad the noble Lord used the words "international economic conference", because the fact is, of course, that we have had a large number of Committees and Conferences. We had the Radcliffe Committee, and, further back, the Macmillan Committee, as well as a number of other Committees. But they have been national Committees, and they have had the opportunity of looking at the matter only from our own sterling point of view, whereas what is required now, as the noble Lord, Lord Boothby, has already said, is an International Conference which will look at the matter not merely from our point of view in this country of sterling, and not merely from the point of view of the United States from a dollar point of view, but from an international point of view in which the trade of all the countries of the world takes a suitable part.
As your Lordships are fully aware, many parts of the world to-day are planning their development for periods of time and not confining themselves to a single year. Some of them work in five-year plans, and some in seven-year plans. The Colombo Plan works in so many periods. India also has a plan; and there are others. I was reading, as some of your Lordships no doubt will have done in the course of this week, an interesting article by a well-known writer and a Member of the House of Commons, Mr. Harold Wilson, in which he suggests that has the time come when we should have a development plan for this country covering a certain number of years instead of being confined to the single year, to which the purpose of our Budget confines itself. I imagine that noble Lords in this House, whatever their Party, and whether they agree with my right honourable friend or whether they do not, at any rate will consider 65 that a question worthy of their consideration.
As your Lordships know, I am an impenitent opponent of the high bank rate as a means for dealing with internal inflation. I do not want to develop that to-day, because I have developed it in the past and may do so in the future. But what I do say to your Lordships— and l want to say it particularly to the noble Viscount, Lord Amory, who has crossed swords with me on this matter in the past—is that I recognise perfectly clearly (and I think even the noble Lord, Lord Boothby, would agree with this) that in the case of temporary crises and a run on the pound internationally a high bank rate may well be the only means of dealing with temporary difficulties. But I hasten to add, first of all, that high bank rate is no cure for permanent disequilibrium in the balance of payments, and may in fact, as I think it has in some periods during the last ten years, and particularly in the last eighteen months or so, actually aggravate the difficulty of the balance of payments by checking the growth of domestic production and reducing the value and the volume of our exports. The other point that I want to make is that I remain, as I always have been, a determined opponent of inflation, which I regard equally with deflation as a fraudulent manœuvre to rob one part of the community to enrich another. Therefore any idea of debasing the unit of exchange by enlarging the basis of credit, which would have this effect, would meet with my firm opposition.
With those premises, I welcome wholeheartedly an examination of the means to place the ultimate source of monetary power on an international footing lying behind the main national central banks. If I may give an analogy which I think will appeal to those of your Lordships who are not so much interested in finance as with a large part of commerce, I would make the analogy of insurance. In the old days when insurance was started there were a few companies who effected insurance, and a company would never have thought of going outside its own ranks to effect insurance; it would probably have been a comparatively small sum with which any one company was perfectly well able to deal. But as time has gone on, in spite of the fact that the companies have 66 grown in resources and width of cover, it has become in many cases if not impossible at least wholly undesirable to do this.
Reinsurance companies have sprung up, and, quite apart from reinsurance companies, there are a large number of companies which have pooled their resources to give adequate cover for large sums running into many millions of pounds; until I believe it is stated in the City to-day that all large risks are covered not only by a combination of many insurance companies in our own country or in some other country but in some cases, at any rate, even by an international co-operation of many insurance companies. It is said now that to a very large extent the great risks of the world are spread over the great bulk of the main insurance companies and that the cover is an international cover and no longer confined to the individual companies or an individual country.
That is a very good illustration of what I think—and I gather this is the opinion of the noble Lord, Lord Boothby—should be the position with regard to the international basis of exchange. We are getting perilously near a very difficult situation, as the noble Lord said, both in the sterling area and in the dollar area; in both cases we have had crises during the last few months, certainly the last few years. It is very doubtful whether we can go on much longer carrying these risks in a single central bank. Therefore we have reached this position: that in some form or other we must underpin the national central banks by some international body which will cover the risk and which will bear the ultimate responsibility for the sanctity and stability of international finance. It seems to me, therefore, that probably, naturally, the International Monetary Fund should be that body.
I am certainly not going to-day to be arrogant enough to suggest to your Lordships precisely what form it should take. We know, of course, that already the International Monetary Fund has taken some steps in the direction of guaranteeing the stability of the individual national central banks, and I think it is exceedingly likely that those steps, which are of a quite small, finite 67 character at present, may well be extended to a larger field. But that is beyond my province. There may be other means, some of which I think the noble Lord himself suggested, of achieving the end, either separately from the extension of the functions of the International Monetary Fund or in conjunction with that, which would probably be better still. Those may also be worthy of consideration. But, after all, in terms of the immense problem with which we are concerned, these points, immensely important as they are, in that vast context are matters of detail.
What we are asked to support to-day, and what I would wholeheartedly support, is the noble Lord's suggestion of having an International Economic Conference to consider precisely the risks that are being faced by national currencies at the present time—whether a conference of world financiers acting for economic international guidance should not be called together in order to try find a way out of this difficulty. I therefore support the major contention of the noble Lord who moved this Motion.
§ 3.40 p.m.
§ VISCOUNT AMORY
My Lords, my noble friend, Lord Boothby, has, I think we shall all agree, raised a subject of very great relevance to our current economic problems. I count it a great privilege to be following to-day the noble Lord, Lord Pethick-Lawrence, whose views on these difficult subjects I know command the greatest respect from all of us. I should like to say to the noble Lord that two things he said particularly I can wholeheartedly agree with: first, when he said that finance ought to be the servant and not the master of economics. I would go further, and I am sure he would agree, and say that economics in its turn should be the servant and not the master of human needs. The second thing which commanded my wholehearted support was when he declared himself a strong opponent of inflation because it most unfairly damages one section of the community in an attempt to help other sections.
At the outset of what, I hope for your Lordships' sake, is not going to be too prolonged an intervention on my part, because mental nourishment on 68 this subject is of a kind, I think, with which appetites are fairly quickly sated, I should like to apologise in advance to my noble friends Lord Boothby and Lord Dundee because I fear that, owing to another engagement which I must fulfil, I may have to miss the last part of this debate. In reply straight away to my noble friend Lord Boothby, I should like to say one or two things before I enter on the discussion of other points. I agree with a great deal that my noble friend has said. I think it was a distinguished Member of your Lordships' House sometime in the last century who, when he was asked if he believed in the Thirty-nine Articles said:They contain all I believe, and a great deal more besides.I think I should say the same in answer to the remarks of my noble friend. But I would quarrel perhaps a little with him about his general economic priorities, if I may put it that way, and in relation to them I would use the words that I think Sir Winston Churchill once used when he said:I find it possible, without unmanageable difficulty, to contain my enthusiasm within the bounds of decorum.Taking the economic experiences of the Free World over the fifteen years or so that have elapsed since the war, I felt that my noble friend Lord Boothby painted a rather gloomier picture than the facts warrant. General performances, at any rate in terms of production and employment, have been much brighter than in the period between the wars. No doubt we shall learn more in the light of experience; and I believe that we are fast learning—when I say "we" I mean all countries—lessons in the economic field. In the light of that experience I am sure we shall find ways of putting up a much better performance still. So far as the United Kingdom is concerned, it seems to me inescapably clear that our progress has been limited predominantly by two factors—first of all, internal inflation and, secondly, persistent balance of payments troubles. The causes of those two troubles, I think, were far less due to the pace of our internal expansion than to the fact that our costs and prices have risen relatively more than those of our competitors; we have suffered from internal inflation and, because our exports lagged, from a precarious balance of payments.
69 With regard to what my noble friend referred to as "Stop and go", I believe that the variations in activity which I think he means to cover by that term have been, compared with anything in the past, extremely small. I think they have been largely due to the fact that ever since the war, with the support of the nation, we have been experimenting to see how close to the maximum ceiling in terms of activity generally and employment we can operate. Having said that, I should like to say that what my noble friend Lord Boothby made in the way of specific proposals, particularly those relate to the International Monetary Fund, I can in a large measure support. I agree with him that, as the years go by, Keynes remains far and away the best authority and guide for our actions.
If we were discussing this subject in a court of law, and not in your Lordships' House as we are assembled at present, I am sure that at the right moment the learned judge would say, "What is international liquidity?" I think he would be right to ask that question because it is a phrase which is very loosely used. I hesitate to offer your Lordships any definition of that to-day, because there are others here present who have far greater expertise in these matters than I have. I would suggest that the purpose of "liquid reserves" is, in the broadest sense, to ensure enough day-to-day short-term finance to keep the wheels of trade turning and, more specifically, to see countries through temporary difficulties arising from difficulties outside their own control or passing phases in their domestic situation.
I entirely agree with my noble friend that there have been times in the past when, in the broadest sense, the supply of money has not increased pari passu with increasing physical resources. Then there have been periods of stagnation or, worse still, acute deflation. The question is, is that the situation to-day or an immediate danger? I myself believe, particularly since the International Monetary Fund in 1959 took steps to increase substantially its resources—a 50 per cent. increase was carried out—that the current problem is not so much one of insufficiency as of imbalance in the liquid reserves of the world. If we can find ways of dealing with, and correcting, that imbalance, I believe that will be of far greater immediate benefit than an increase in the aggregate 70 liquid reserves of the world. We have to face the fact that, at the present time, the International Monetary Fund has considerable resources beyond those that are being actively used or are at the present time available for use. International liquidity is, I think, something which is not precisely measurable by figures. If it could be, I doubt whether we should know—whether anyone would know—what the right ratio would be between the reserves and the trade done. I do not think there is any evidence yet on which any mathematical formula could be worked out. I think it is much more subjective than that. As the Radcliffe Committee, which my noble friend reminded us was set up as the result of his initiative—I am feeling in a very generous mood this afternoon—
§ LORD BOOTHBY
My Lords, if my noble friend would forgive me for one moment, he was not himself really concerned; it was Mr. Thorneycroft who set up the Radcliffe Committee and acknowledged that he accepted my suggestion.
§ VISCOUNT AMORY
The noble Lord put it to us, I thought with becoming modesty, that he was the inspiration behind this good idea. It was that that I wanted not to quarrel with this afternoon. If I may just repeat what I was saying, as the Radcliffe Committee put it, liquidity is not simply money in the bank—actual holdings of gold and reserve currencies—but also money that people think they can raise. One distinction which I feel is important when we are considering these matters is that we must not get confused between liquidity or liquid reserves and long-term development finance, which must be related to the long-term credit-worthiness of the borrower. In the last year or so we have seen a substantial increase in the reserves that countries can raise, if they need to, through the International Monetary Fund and Her. Majesty's Government from the beginning have most strongly supported the initiative that resulted in that expansion. But I think the effective reserves have increased over recent years in another and a rather less tangible way.
I believe we have come a long way in the international acceptance of rules of what I might call "good-neighbourly conduct" and that to-day we recognise 71 (and by "we" I mean the countries of the Free World) far more than ever before the damage that import and exchange controls can impose on the earning power of our trading partners. I believe creditor countries are to-day readier to take their own measures to offset an excessive inflow to their reserves; and I think, therefore, that countries can expect from now on that to a far greater extent than formerly their difficulties will be eased and not aggravated by their neighbours when problems of imbalance arise. I hope very much that we shall see consultation —between central banks for instance—still more close and intimate than it has been to date. A very successful operation took place at the end of 1958 when a group of countries in Europe, including the United Kingdom, co-ordinated a movement in the direction of greater convertibility, preceded by consultations between them. That is a model for future action.
I think that the United States, by its extremely responsible action and conduct in the economic field since the war has set a good example. At a time when it was earning a big current surplus—and it is still earning a substantial current surplus—it made use of that surplus by pouring out dollars in the form of defence expenditure and aid and in capital loans and investment. That is precisely what Britain did in the days when we were a big creditor country. I hope very much that our German friends will learn to do the same thing in the days of their prosperity—prosperity in terms of current export surplus.
I believe that all this progress has meant that international liquidity has increased far more than is disclosed by any figures of holdings of gold and exchange. As I mentioned earlier, the purpose behind liquid reserves must be to enable a country to have reasonable room for manœuvre so that it is not forced into policies of severe restriction which may damage its own and its neighbours' economies. But the purpose is not to safeguard a country which is in a position of persistent imbalance, due to either persisting weaknesses or incorrect economic policies, or to provide a country with long-term development capital. If liquid resources are used for that 72 purpose, then the reserves, as liquid reserves, are unlikely to be rebuilt and will simply tend in the long run to add to existing imbalances.
We must not, therefore, ask for liquid reserves to do more than they are really there to do, or we may aggravate the problem instead of solving it. The connection between international liquidity and development finance is that if we can make the fullest use of international liquidity for its proper purposes, we shall all be in a much stronger position to do justice to the large demands made on us by the underdeveloped countries for aid and investment. From the increased resources which we ourselves can generate from our own economies, we shall be able to provide bolder development finance.
I said just now that I thought the present problem was one of imbalance rather than one of insufficiency. What signs are there for insufficiency to-day? There is an unused potential for food production, but that is not due to any lack of liquid reserves but lack of purchasing power resulting from insufficient earnings in many parts of the world. There is an unfilled demand to-day, at current prices, for capital goods, but except in the United States, there is to-day little spare capacity available in industrialised countries for that purpose. That means, of course, as I think we should all agree, that there is clear need in all the industrial countries of the Free World, and notably ourselves, to increase the proportion of our national income available for prudent productive investment. But that I will not stress to-day, because it is really a matter of internal economic policies. But if imbalance is the real problem, what are the remedies? May I first mention one or two which I do not believe will prove adequate to meet this problem?
First of all, my noble friend mentioned the possibility of an increase in the price of gold. I think, myself, that if we could all wake up one morning and find that that had happened, on balance it would be a good thing and of benefit to the sterling area; but it would, of course, benefit most those countries who hold the biggest gold reserves and, secondly, those countries who produce gold. Meanwhile, the speculation which would centre round 73 the contingency of a possible rise in the price of gold would be thoroughly bad. But as my noble friend has indicated, that problem has been rather put at rest by the categorical denial of the President of the United States that it is their intention to increase the price of gold.
Then there is another remedy: exchange revaluation from time to time. Of recent years there has been cumulatively growing evidence that the Deutschmark has been overvalued, and in spite of the recent change it probably still is; but I believe there is no similar evidence that to-day either the pound or the dollar is overvalued in relation to other currencies in general. What I am sure we must all remember is that devaluation affords temporary relief, but unless it is followed by a correction of the mistakes that have caused the undervaluation, it will be limited to temporary relief only. My noble friend mentioned floating exchange rates and that idea is, in theory, extremely attractive, because it seems to offer the possibility of automatic adjustments from time to time, when circumstances make them desirable. But we must bear in mind that inter-war experience of free and floating exchanges was not at all happy, and we have to face the situation, at present, that the rules of the International Monetary Fund provide for exchanges to fluctuate only within set limits. I think the wisest course at the moment is to continue to operate under the existing rules of the I.M.F.
Another solution has been suggested by some who say that if each country were to operate its own economy on the lines of the highest possible level of activity, regardless of other economic considerations, world trade would flourish, aid to underdeveloped countries could be increased and we should have the golden age of collective expansion. But personally I believe that would be a disastrous recipe for the millennium, because it would lead to one of two results: either to world inflation or a return to highly restricted markets and what I might call "national siege economies". With regard to the United Kingdom—and although the United States has a much larger margin of safety the same is, I believe, fundamentally true of that country also—no policy is safe for us which does not have as one of its main aims careful and effective control 74 of our costs of production relative to those of our competitors; and in the present circumstances that means the necessity for price stability. For safety we need, predominantly, two things—price stability and a high rate of investment, both of which are within our own control if we decide that we want them badly enough.
My Lords, may I now suggest on what internationally we ought to concentrate our immediate efforts? Here I think I find myself quite substantially in agreement with what my noble friend and the noble Lord, Lord Pethick-Lawrence, have said. I believe that the progress made in the field of international economic co-operation since the war has been immensely encouraging. In particular, we have three highly successful examples: first, the O.E.E.C., a cooperative exercise in self-help, stimulated and most generously assisted through Marshall Aid from the United States; secondly, the Interna6onal Monetary Fund, a soundly conceived instrument for evening out the strains on the exchange rates, variations due to the balance-of-payments difficulties of particular countries; and, thirdly, the International Bank, a co-operative lending agency for medium and long-term development finance. All three have met with, I think, a remarkable degree of success; and all three of them justify our continuing, wholehearted support. I would go further than that and say that we ought to see whether we can expand and develop the scope of all three of them.
The O.E.E.C. is now in course of being turned into the O.E.C.D., a body comprising the old members of the O.E.E.C. plus the United States and Canada as full members. That decision on the part of the United States and Canada to keep open an economic link with Europe is, I think, a very significant one, again worthy of our strong support, which it has received. This body has the additional rôle, which O.E.E.C. did not have, of co-ordinating plans for aid and development, and I am sure that it has a most stimulating opportunity ahead of it.
The International Bank, under the energetic leadership of Mr. Eugène Black, already has great constructive achievements to its credit. I think that 75 the biggest one of all is the very imaginative Indus Waters scheme, far and away the biggest thing of its kind that has ever happened in the history of the world in the form of practical economic co-operation between countries. The Bank's field, of course, is, as I have said, the provision of finance for development projects, and it is going to be assisted in the future by the new body, the International Development Association, whose business will be more in the field of basic development needs which cannot be financed on quite so strict terms as would be the projects normally covered by the International Bank. I am sure that we must give both those bodies, the International Bank and the International Development Association, our continuing support.
But in the field we are discussing to-day it is the International Monetary Fund which has the chief part to play. As I mentioned, in 1959 the International Monetary Fund increased its resources substantially. So far, those additional facilities are perhaps being used less than one would have expected; though in 1956 the United Kingdom drew a considerable sum from the International Monetary Fund and paid that back before the date when it was due. That was an example of exactly the way the resources of the International Monetary Fund were intended to be used. I am sure that the right policy now is for us to see how the scope and the operations of the International Monetary Fund can be further expanded in the light of experience to date. This, I know, is the policy (as I am sure the noble Earl, Lord Dundee, will tell us later) of Her Majesty's Government.
I think it is very encouraging that the President of the United States, in his message to Congress of February 6, declared himself in favour of studies to see how the International Monetary Fund could be strengthened and utilised more. He also made a very significant statement: that the United States would not hesitate, if and when circumstances made such action appropriate, to make use of the drawing rights of the I.M.F. So, my Lords, I believe that the main line of our action should be to develop further the scope and operations of the I.M.F. In what directions can this be done?
76 I should like, finally, to make several suggestions, though I will not venture today to select which of several will turn out to be the best. But my noble friend has mentioned the proposals associated with the name of Professor Triffin, and I should like to add the names (I am not sure whether he mentioned them) of Mr. Bernstein and Mr. Maxwell Stamp. All of their proposals are interesting, and all worthy of consideration. But I agree with him: I think that the direction in which we must look for an expansion of scope is ultimately in the direction of the I.M.F.'s becoming something more like a central bank for central banks, perhaps ultimately a credit-creating body. But I believe that there is a great deal that can be done without changing the Fund's constitution. We must be careful, as I have mentioned, not to trespass on the field of the International Bank. I doubt whether the time has yet come, if ever it does, to consider replacing the reserve currencies of the world by a special currency of the International Monetary Fund.
Recently I had the pleasure of meeting again in Washington the very able head of the International Monetary Fund, Mr. Jacobsson, as I frequently did when I was at the Treasury, and I found him by no means pessimistic about the difficulties confronting the nations in this field. He was anxious that the facilities of the Fund should be more fully used and he believed that they could be without any radical change at present in the constitution. But as he always has done, he emphasised very strongly to me that the use of the resources of the Fund is no substitute for the adoption of correct economic policies by the member countries. There must be an element of discipline still left with the individual countries.
It seems to me that the steps that can most usefully be taken forthwith are these. First of all, countries which are in temporary difficulties should be encouraged not to hesitate to make use of the resources of the Fund. Secondly, I think that the member countries need to devise methods of concentrating drawings on the currencies of those countries in overall surplus. Thirdly, I think that the Fund should go further and be prepared itself to borrow the currencies of countries which are in surplus for onward lending to those which are in deficit. I believe that all those things 77 are possible developments which are under study by the Board of the Fund.
Beyond this sort of immediate action, I believe that all member countries should give a lot of thought to the best ways in which the scope of the I.M.F. can be further developed in the longer-term direction of becoming a central bank with rather more positive tasks. But, as well as developing the work of the Fund in this way, let us press on wholeheartedly with ever more intimate consultation and collaboration, day to day, between central banks and between the finance departments of Governments of the Free World; and let us ourselves make it our constant concern to take whatever steps are necessary, whether they are agreeable or not, to ensure continuing confidence in the stability of the major trading and reserve currencies, the dollar and sterling, on which at present the bulk of the trade of the world is done. My Lords, may I, with respect, congratulate my noble friend on raising this subject in such an agreeable way, and on giving us the chance of having what I am sure will be a useful debate.
§ 4.10 p.m.
§ LORD ROBBINS
My Lords, may I, in my humble way, beg to associate myself with the distinguished speakers who have preceded me in congratulating the noble Lord, Lord Boothby, on having raised this most interesting and momentous subject? The problem of the need for international liquidity is indeed one of appalling intellectual difficulty. It is easy to get into a muddle about it, and the more it is discussed at this stage in public the better, I am sure, for all concerned. Indeed, it is in this connection that I find myself, almost at the outset, slightly in disagreement with the noble Lord.
The noble Lord, in the ardour of his passion, is anxious to move forward to an international conference, and he reminded your Lordships that he had been successful in conjuring from the empty atmosphere, so to speak, such confabulations. I wonder whether he has had, as I have, the experience of the ardours and endurances of international conferences of the kind that he wishes to invoke. I speak seriously when I say that I should doubt very much the usefulness of one of these grand, international gatherings at this moment. Before we summon such a 78 meeting, it is surely necessary that we should know much more clearly than we do at this moment—all men of good will—what we want. An international conference is a good thing when the ideas which it has to confirm have been properly thought out in influential quarters beforehand, and when, from the word "Go", there is adequate intellectual guidance by those who are in a political position to take the lead. Otherwise, I think it is doomed to futility.
I think we can all agree with the noble Lord, Lord Boothby, that the present situation is not satisfactory. Indeed, I feel perhaps more at one with his mood than with that of the two noble speakers who succeeded him, in that I am conscious, here and now, of profound dangers to the immediate stability of the world. As the noble Viscount, Lord Amory, reminded us, one must not underestimate the resources of the International Monetary Fund, but the apprehensions over wide areas concerning both the future of the dollar and of sterling suggest, at any rate to my way of thinking, that all is not well with international finance and our international machinery at the present time. I think, moreover, that the multiplication of plans from distinguished experts such as those who have been mentioned in this debate is another indication of a certain degree of malaise. There is a certain correspondence between supply and demand in this matter, and when the experts become more than usually active one can normally assume that there is something wrong in the offing.
Now, my Lords, what is it that we aspire to when we seek to establish better arrangements with regard to international liquidity? Personally, I could not agree more than I do with what the noble Viscount, Lord Amory, said with regard to long-term development. I do not think that we want to increase international liquidity in order to promote developments of that sort. Long-term development is better promoted by a different kind of finance—by long-term loans. I do not say that everything is perfectly satisfactory in this respect—it seldom is in any department 'of human endeavour—but, as the noble Viscount, Lord Amory, said, the International Bank has not done at all well, and if 79 there still are lacuna in that quarter, then improving the International Bank and the resources at its disposal—
§ VISCOUNT AMORY
May I interrupt the noble Lord? I think he said that the International Bank had not done well. Did he mean that?
§ LORD ROBBINS
I meant to say that the International Bank has not done badly. I apologise. The International Bank is an institution of which I am a very great admirer. Certainly, if things are deficient in that respect, we should seek to strengthen the International Bank, rather than throw on the shoulders of the International Fund, or any other organ of short-term finance, the burden of such a policy. What we need, surely, my Lords, in regard to international liquidity, is resources Which are capable of dealing with either one of two types of difficulty. First, we need adequate reserves against sudden, short-term movements of hot capital. The different financial centres of the world need elbow room to avoid hampering restrictions on the smooth development of internal business; and this need is, of course, immensely important to the two great financial centres of the world—the United States and, especially, the United Kingdom, which has to work, as it does at present, on such narrow reserves with such extensive, foreign, short-term obligations.
Secondly, we need a cushion to meet temporary difficulties on current account. Now here again I find myself in very great agreement with what was said by the noble Viscount, Lord Amory: that liquidity, by itself, does nothing to cure the fundamental malaise here. Indeed, I would go so far as to say that if the country finds itself in such circumstances and does nothing by way of internal policy to put them right, then the availability of more liquidity may be a snare and a delusion, and the last state of the country may be worse than the first. Nevertheless, if such adjustments have to be made and are being made, then the presence of adequate liquid reserves is unquestionably a great advantage.
Now, my Lords, in our time two great plans have been developed in order to cope with this fundamental need—the Keynes plan, the famous clearing union, and the White plan, which resulted in the 80 creation of the International Monetary Fund. When I was a public servant I worked very hard for the Keynes scheme. I believed in it passionately, and I was very disappointed when it had to give way to the much more complicated White plan.
I must digress, my Lords, for one moment to beg to differ, with great respect, from the noble Lord, Lord Boothby, when he suggests that Mr. White destroyed the Keynes plan out of sinister intention. I know nothing of the alleged activities of Mr. White in relation to espionage, and so forth. What evidence I have read still leaves me with many marks of interrogation in my head. But I was, together with Lord Keynes, in the most intimate contact with Mr. White during the critical months of negotiation with regard to those plans; and I am quite sure (and of this I am absolutely certain that Lord Keynes was also quite sure) that Mr. White wished well to the world, and his motives in wishing to substitute his plan for the Keynes plan were impersonal motives, based on considerations of the local American situation—what was possible with Congress and what was impossible. And they were also based on certain more fundamental considerations, perhaps, of what was desirable in the interests of the stability of the world.
§ LORD BOOTHBY
My Lords, may I say at once that I accept the opinion so authoritatively expressed by the noble Lord.
§ LORD ROBBINS
My Lords, that is very kind indeed of the noble Lord, Lord Boothby. I am sure that what he has said will give pleasure to the many people in many parts of the world who had the privilege of working, as a band of brothers (as we were in those days), with the American experts who were part of Mr. White's team, and who still survive.
Returning from this digression, my Lords, I say that I was disappointed when, by reason of political force majeure, the Keynes scheme had to be abandoned in favour of the White scheme. But I am bound to say this—and here, of course, the noble Lord, Lord Boothby, will not agree with me: looking, back, I doubt very much whether the Clearing Union would have been the solution to all our difficulties. 81 I am inclined to think that the Clearing Union suffered a little from that deficiency on which the noble Viscount, Lord Amory, put his finger, when he warned us against confusing the need for liquidity with the need for long-term development. The Clearing Union was (and I use the term not in the least disrespectfully) a great "cure-all". It was a proposal to solve a great many problems of the world at once. Having regard to the history of the world since this proposal was propounded, having regard to the incessant inflationary urge, the high rate of return on investment, and the conditions of full employment which have prevailed in most parts of the world since the conclusion of hostilities, I cannot conceal from myself the fact that I now believe that, had the Keynes plan been in operation, there would have been rather more inflation than less.
Well, we did not get it; instead, we got the International Monetary Fund, with all its complications and the Chinese puzzle of its Statutes and its Regulations. It was not a sinister scheme, if I may say so to the noble Lord, Lord Boothby (I am not thinking now of Mr. White's connection with it); it was not designed "to crucify mankind on a cross of gold." Apart from the elimination of the unlimited liability to credit, the scheme was the joint product of the efforts of United States, United Kingdom and Canadian experts, of whom, of course, Lord Keynes was the chief of all. Because once he realized that his own scheme was impossible, he flung himself into the task of making a success of the other. While I think that, in many respects, it is an imperfect instrument, I doubt, looking back, whether, in the conditions of those days, the instrument could have been much different from what it actually turned out to be. Here it is—a going concern. I do not want to say a word in disparagement of what it has already done, or in disparagement of the devoted labours of successive heads of the International Fund, particularly Dr. Jacob Jacobsson, whose efforts to promote international stability and enlightenment in financial affairs have been so conspicuous and, if I may say so, so beneficial, at certain times of crisis, to the people of this country.
82 Moveover, I am bound to say (and here I am afraid that the noble Lord, Lord Boothby, will think I am showing signs of the cloven hoof) that I do not think that since 1945 there has been any deficiency in liquidity. Indeed, the very fact that during most of the years since 1945 the world has been suffering from a pretty brisk inflation, surely suggests that liquidity, in the aggregate, has been ample enough. Surely the trouble, my Lords, is that the provisions of the International Monetary Fund and the general conditions of international liquidity, as constituted by the existing distribution of reserves, do not afford enough elbow room for the key currencies. The trouble is that of the proposed remedies which are put forward, none seems to offer a really satisfactory solution. We have had one increase of quotas all round, to which allusion has already been made. Doubtless the position is better now, as a result of that policy, than it would have been if it had not been pursued. But it had as a by-product the increase in the holdings of the Fund of all sorts of currencies that nobody wants; it also had the by-product of certain increases of liability for the key currencies.
I see no ultimate solution to the liquidity problems of the world at large by way of all-round increases from time to time of that sort. On the other hand, the more ambitious changes, as have been suggested by Professor Triffin, seem to me to come up against grave difficulties of a kind which I fancy the noble Viscount, Lord Amory, may have had in mind in his observations on this subject. We cannot expect the strong areas to put their reserves, or a proportion of their reserves, at the disposal of the authorities of the Fund without a very substantial alteration, I am afraid, in the voting quotas of the Fund—and an alteration, be it noted, which would not be in favour of the United Kingdom at this moment.
I cannot help feeling that this problem of the government of the Fund goes very deep. I do not want to be mistaken on this matter, but since the war the open conspiracy (so to speak) of men of good will has circumnavigated all sorts of difficulties in a constitution which I think a visitor from another planet would have thought to be almost unworkable. It is astonishing how you 83 can get on when you want to do something. Nevertheless, proposals for reform, particularly of the Triffin kind, are, I think, likely to come up against very great difficulties indeed. Nothing was harder at Bretton Woods than the negotiation of the voting rights. The imagination simply boggles at the idea of the reopening in peace-time, when there is unlimited time for argument of irrelevancies, of negotiations of this sort.
Looking back, I must confess that I sometimes wish that it had been possible to adopt at that time the key currency approach which was advocated by certain American experts—notably, by Professor J. H. Williams—rather than this elaborate and more universal approach to the problem. I cannot help thinking that an agreement between the chief central banks, perhaps on the lines of the Genoa resolution, would, in our day at any rate, have served our purpose better than the machinery which was ultimately devised. But that, of course, is jobbing backwards. Let no one think that it was a solution which we could have adopted then. The majority opinion on the American side was against it. The then President of the United States aspired to universal solutions. When he thought of an international institution, he thought that they must all come in, however great the complications of government which ensue.
Frankly, I do not see the ideal solution in present circumstances. I suspect that the further evolution of policy in this respect will depend a great deal more than has been suggested hitherto in public discussion on the evolution of other international organs and other political associations. Some difference surely will be made to the functioning of the financial machinery of the world if the present aspirations for the coordination of Western Europe come about, whether or not it be our decision to join them.
I think that, at this difficult stage in the evolution of human affairs, we must keep our minds very open for the possibility of the emergence of all kinds of new experiments in this direction, and all kinds of experiments which are not necessarily universal in their application. However, meanwhile we have to live. And to guard against present dangers, 84 I personally should hope that the authorities of the International Monetary Fund would lose no time in seeking reinforcements on the lines suggested by Mr. Bernstein, imperfect as those lines may prove to be as a long-term solution of the problem. While the financial world is in this touchy state as regards sterling and the dollar, it seems to me to be important not only that the Fund should be able to cope with whatever contingencies may arise but that it should appear abundantly able to cope. For that reason, it would seem to me to be the path of prudence that it should seek to reinforce its resources on the lines which Mr. Bernstein has suggested. But, of course, this involves, so to speak, supplementary arrangements among the proprietors of the key currencies. Whatever is done in this way in the international field, however, I would say—and I hope that this does not cast a shadow on what has been so pleasant a discussion—there is for us in the United Kingdom a very special duty to lose no time in putting the unbalance in our current balance of payments in order.
Why are people troubled about sterling? Is it really the wickedness of certain bankers in Zurich? I think that we deceive ourselves if we seek comfort on those lines. People are troubled because they see happening in the official statistics what in 1957 they only had reason to fear would happen—namely, the emergence of a serious unbalance of our balance of payments on current account. Why is this? We can think of all sorts of explanations, and all sorts of explanations are put forward almost every day—people work harder elsewhere; they are more intelligent; industry here is not so efficient as it should be; exports are insufficiently labelled; we have not a decimal system, and so on. And doubtless there is some point in most of the things which are said on these lines. Doubtless there are all sorts of little things wrong which, if they were put right, would help. But I have no doubt whatever that the main thing that has happened in the last twelve months is that once more in this economy aggregate expenditure is outrunning productivity, and, as always when this does not take itself out in the direction of inflation, it takes itself out in an increase of imports and a failure of exports to keep pace. People who 85 will not admit this remind me of the man in the American fable who can see the fly on the barn door but cannot see the barn door.
If this is so, we need a policy that puts it right. In this connection, I think we need to remind ourselves that, according to modern ideas, the control of aggregate expenditure is a proper function of government. Let me say at once that, strong believer as I am in a vigorous monetary policy, I do not believe that in present circumstances monetary policy by itself can cope with the situation. Indeed, I would go so far as to say that, in the easy conditions as regards aggregate expenditure, which I am afraid have developed as an unforeseen by-product of the Budget last year—the noble Viscount, Lord Amory, will forgive me—the most vigorous monetary policy which is practicable in the circumstances could be described, in the words which the noble Lord, Lord Cobbold, used before the Radcliffe Committee, as a mere spitting against the wind.
It is urgently necessary, I suggest—and by "urgently" I really mean urgently—to have a policy that recognises this fact. The idea that in present circumstances, with capacities so fully extended, we need a further overall increase of expenditure, seems to me to be not only absurd but very dangerous. What we need, surely, is a financial policy which, while it provides more incentive to initiative and development, at the same time keeps aggregate demand at a level at which a surplus in the balance of payments on current account once more reappears. A policy of that sort does not necessarily involve a limitation of investment. Aggregate expenditure comprises not only investment but also consumption, and the policy that I have in mind would certainly not leave that possibility out of account. If that is done, if we keep our aggregate expenditure sufficiently under control, then I should have no serious doubts about the possibilities of our growth and prosperity in future. If it is not done I am afraid that there is pretty grave trouble ahead.
§ 4.39 p.m.
§ LORD SALTER
My Lords, several criticisms have been made of some of the detailed proposals and comments 86 made by my noble friend Lord Boothby in moving this Motion. I agree with my noble friend Lord Amory in what he said about the unsuitability of using liquid reserves for long-term projects of development. I also agree with my noble friend Lord Robbins that the immediate convening of a large public international economic conference would not be desirable at this moment. It needs to be preceded by a great deal of preparatory work and by more restricted and more private conferences and consideration. I am inclined also to agree with him in retrospect and in the knowledge of after events that the precise proposals that Maynard Keynes put forward at Bretton Woods would not have proved suitable to the development of world events as we have since seen them.
I think we should all agree, however, with Lord Boothby's main theme, that we need to develop, modify and supplement our international institutions and co-operation between them and national authorities, upon the lines and with the objectives of the resolution he quoted from the Genoa Conference. We all realise, too, the enormous importance of the theme which he has been discussing. I am very glad that he put it in the perspective, not merely of current and immediately prospective events, but in the wider perspective of the last forty years or so. Its significance, I think, is shown to be much greater when we see it in that perspective. It is, in my view, not too much to say of that period that its history, social and political as well as economic, can be written in terms of the alternation and recurrence of inflation and deflation; the gradual erosion of the framework of society by inflation and the sometimes suddenly explosive effect of deflation through unemployment and destitution.
The noble Lord, Lord Boothby, referred to one example of what I think, and thought at the time, was a very misjudged revaluation of the pound sterling in 1925. I was not then like the noble Lord, a public figure, but only a muted official. I was, however, head of the Leeds economic and financial section, and therefore saw what was happening. I think it is common knowledge that the Chancellor of the Exchequer at that time, Mr. Winston 87 Churchill (as he then was), consulted Maynard Keynes as well as the Treasury officials and the Bank. I believe it is true that he has subsequently expressed his regret that the combination of the Treasury and the Bank prevailed over the advice that was given to him at that time by Maynard Keynes.
Certainly there followed from that decision, first of all, the coal strike and the general strike, and then, not merely those later events referred to by the noble Lord, Lord Boothby, but even earlier, a national economic depression at a time of world prosperity which lasted until 1929 we were suffering a national depression even then. I think that mistaken judgment was due to an assumption that the old monarch, gold, with its gold standard, still commanded sufficient power to impose its will upon the economy of the country. It was a false assumption. The Treasury believed that if you put up the pound sterling then you would have a downward adjustment of wages and costs and all would go on happily. But social and industrial organisation by that time had gone too far and grown too strong, both on the trade union side and on the industrial side, to make that possible. Wages and prices did not go down, and we had what we now remember as a great disaster that led later to greater international disasters.
The noble Lord, Lord Boothby, also gave another example. While what happened before the return of Hitler was due in part to long-term and world economic forces, such as we have been referring to, I think the situation which made his return possible was precipitated largely by that last-moment drastic and excessive deflationary policy of Dr. Bruening in a frantic attempt to save the mark at a time of world financial crisis. It was that that immediately gave the chance for the return of Hitler, who had been an almost invisible and negligible figure ever since the Putsch of 1923. Well, my Lords, it is not to be wondered at, with these tragic memories in mind, that the famous phrase of W. J. Bryan, "Crucified on a cross of gold", should have been referred to both by the noble Lord, Lord Pethick-Lawrence, and by the noble Lord, Lord Robbins, as applicable to the period to which I have been referring.
88 But it is also true that similarly compelling examples of equally disastrous inflation, first creeping and then sometimes galloping, could be cited. Some safeguard, a regulator, is essential. For a period this was attempted in the form of an almost automatic gold standard. For a time it worked well, through the accidental discovery of new sources of gold supply at a time of world economic expansion, which it would have otherwise impeded or frustrated. That time passed, and gold has since been displaced from its throne as an autocratic and capricious tyrant and converted into a more constitutional monarch through other regulatory methods and institutions. The only justification of the tyranny of gold was the absence of international institutions of sufficient competence and power, and sufficiently trusted, and an adequate co-operation between them and the authorities of principal financial countries. That justification has not entirely disappeared. But it has been substantially modified by what has been learnt and what has been created in the last few decades.
Since the Second World War we have certainly been in a much better position than we were after the First. Through the foresight and wisdom of such measures as Lend Lease, and then Marshall Aid, we were relieved of the burden of intolerable governmental debts. We were also saved by the bitter memories of irresponsible private lending in the 'twenties from a repetition of a similar folly. We have also, since then, as we have been reminded, created new international institutions, such as the International Monetary Fund, and we have improved methods of central bank co-operation. With these advantages, much has already been done, and much more may be done, to save the world from the disastrous effects of desperate national policies such as competitive currency devaluations, drastic deflation or sudden restrictions of imports, such as we witnessed between the wars. We are now in sight of the goal of concerted national action which will enable the world to avert the disastrous consequences of unilateral unwisdom or desperation.
I should like to make a few tentative comments suggested by our experience as to the lines on which further progress 89 might be sought, and some of the limiting considerations. My first is a negative one. I was glad that the noble Lord, Lord Boothby, rejected as the right solution to seek a change in the price of gold. I have never believed during these last few years, when it has been so violently advocated, that that would in fact be practicable; and, of course, it is less than ever practicable or possible now. Apart from its practicability it would have had certain disadvantages. It would have given a certain immediate relief which would have reduced the stimulus towards more permanent and more ultimately valuable reforms which we ought now to consider urgently. I therefore welcomed President Kennedy's statement about the dollar, as I welcomed subsequently Mr. Selwyn Lloyd's statement about sterling.
With a fuller use of existing institutions and methods of co-operation, it is certainly possible to increase liquid reserves without a proportionate increase in the world's total gold stocks. At the same time, it is true that the freedom of action in currency policy of a country like our own, responsible for an international currency—one of the two main international currencies—and also with our vital dependence on imports, is, as the noble Lord, Lord Robbins said, narrowly limited. It has to be at all times adjusted both to the condition of our economy at the time and to the action of other major countries.
What Maynard Keynes taught us, and the subsequent misapplication of his doctrine in some cases, I think, illustrate this strikingly. Writing before the late war, he showed how a flagging domestic demand in relation to productive capacity could be stimulated to the general advantage. It was a double tragedy that his advice was not followed before the war, when it was applicable, and that it then influenced policy so much in the years after the war when demand was greater, not less, than productive capacity. Maynard Keynes was in the position of a doctor who had prescribed, and wisely prescribed, a cure for a patient suffering from low blood pressure, and then later the same prescription was applied foolishly by others to a patient suffering from high blood pressure. The consequence, as has been pointed out, was the devaluation of the pound in 1949. Any inflation which 90 would again plunge us into a chronic balance-of-payments deficit would not only be harmful, but fatal. The more the policy of other countries—with such influence on their policy as we can exert—assists us to maintain the requisite level of exports, the better. But so far as that fails, domestic action, however painful and difficult, is imperative.
While, however, the ultimate responsibility for a country's chronic weakness in its balance of payments must rest on that country itself, concerted action between different countries in critical periods is, I think, also essential. If the world is to enjoy a reasonably stable currency system, it is essential that, when there is a serious disequilibrium in balances of payments such as there has been recently, the surplus countries should take action to correct it which is complementary and opposite to the action of the countries which are in deficit. That is required in addition to any aid the deficit countries may obtain, or should be able to obtain, from the International Monetary Fund.
I am not speaking of the long-term cure for chronic weaknesses, but of emergency situations. It happens that the measures the surplus countries at such a period can take—a lowering of interest rates, a reduction of tariffs and removal of other restrictions to tariffs, increased foreign investment or foreign aid; even, I would add, a revaluation upwards of their currency—are not only all an advantage to other countries but, on balance, usually an advantage to themselves. On the other hand, the emergency action, as distinct from the slowly operating remedial measures for a chronic weakness, which deficit countries may otherwise be compelled to take at such a time, hurt both themselves and others. If they raise their rate of interest, they attract hot money which gives monetary relief but aggravates their later position. If they raise tariffs, or impose quotas, or if they devalue, they harm both themselves and others.
Happily, the doctrine of complementary action is increasingly accepted, and its application in practice, though still inadequate, has had at least some notable examples. A decade or so ago, when the relative position of the different countries was very different from what it is, 91 now, the O.E.E.C. countries gave preferential treatment in commercial policy to Germany when her balance of payments was adverse. So did Belgium, then with a surplus, to her colleagues in the O.E.E.C. which were then in deficit. More recently, the complementary movements in interest rates of Britain, the U.S.A. and Germany are examples, though small ones, of similarly complementary action. I would add as more significant, though it is sometimes questioned, the recent revaluation of the mark. I do not propose to discuss that at length, but will merely remark that such an upward revaluation by a country with a surplus balance does not cause the same harm or involve the same dangers as devaluation under strain by a deficit country.
I am aware, of course, of the immediate strain on sterling that was involved in this case by short-term operations, whether of speculators or of merchants concerned with immediately prospective obligations. But this emergency strain was at once countered by concerted central bank action. The emergency, indeed, gave a useful stimulus to such action and, incidentally, affords a valuable precedent for the future—though, of course, as I have said before, the deep-rooted weaknesses in our economy will remain and will require to be dealt with by domestic longer-term measures.
There is, I think, no doubt that international action, and national action within a framework of accepted international policy, would enable liquid reserves to be increased without endangering the purchasing power and stability of the different currencies. Within such a context, some of the present rigid requirements—the noble Lord, Lord Pethick-Lawrence, referred to some in America, for example—as to gold backing could be safely modified, and other technical measures which I will not now discuss in detail would be possible. The I.M.F. has already done much. With greater resources and authority, and suitably modified along lines which have been suggested in to-day's debate, it could, I think, with the present able leadership of my old colleague, Professor Jacobsson, do a great deal more. Central bank co-operation, of which the value has been so recently illustrated, could be further developed, and in proportion, as competence and confidence in international 92 institutions and action increase, the world's dependence on physical gold will be reduced. These at least seem to me in broad outline the directions in which we should seek progress and the limiting considerations of which we must take account.
§ 5.0 p.m.
My Lords, measured in 1951 pounds, reserves of to-day are little more than they were in that year. Meanwhile, the volume of trade has increased by 30 per cent. and the volume of international investment has increased enormously too; so that any crisis of confidence leading to the "leads and lags" going against the pound and removal of foreign investment from this country, from the Stock Exchange here, could be on a very much larger scale than previous crises we have had to face. We have always known our reserves were inadequate, and for myself, as things stand at the present moment, I can see no chance of replenishing them at all except as part of a corresponding obligation incurred through the import of capital in one form or another.
We have faced various crises since devaluation, but we have shaken them all off by various expedients. The expedients may have been perfectly applicable to the climate of the time, looking abroad, but at times they were extremely unsuitable for the internal climate of the day. Time is against us; the undervaluation of the pound which was set on foot by the revaluation by Sir Stafford Cripps is wearing off, because our wages and our salaries have been going up faster than productivity. There is an increasing volume of world trade, and not only in volume but also in money, by reason of world inflation, so that a rise or fall in imports or exports in percentage represents a larger actual surplus or deficit than it did, say, ten years ago. On the other hand, ten years of Conservative Government have given the world a great deal more confidence in sterling, and the "vultures of Zurich" must be getting a bit tired of sitting waiting to feast on the corpse of the pound.
Nevertheless, when we consider that the pound has been made more and more convertible on capital account and we have progressively divested ourselves of our power to restrict imports, the position is rather frightening. I believe 93 it was a grave mistake to remove the dollar exchange restrictions and the dollar import restrictions at the same moment. I think the risk was too great. But it is not only the value of increasing trade that increases the need for reserves; the potential mobile capital in the world is increasing very greatly, far faster than trade. That is a much bigger factor to-day than surpluses or deficits in trade. Before the economic recovery of Britain and Europe, North America was about the only safe place for funds, and anybody who could manage to steer them there proceeded to do so; all of us in Europe had to have exchange controls to stop this movement. Now the area of potentially safe investment is far vaster: it comprises most of Europe as well as North America, and of course the traffic is no longer all one way. It can be in various directions, and therefore the impact is more manageable. But there is one way potential there, nevertheless. One can visualise a situation of a scare in Europe, a war scare perhaps, or a scare of a great slump in America, when the traffic could indeed become one way, to or fro across the Atlantic; and that could be a far greater crisis of confidence than we have ever seen before.
Fortunately, the first crisis of this nature has hit the dollar, and the American reaction has been such as to bring home to the central bankers the need to do something about it, as we have heard from many eminent noble Lords this afternoon. The dollar trouble was roughly this, as I see it. Since the war funds have been piling up in the United States, chiefly on the Stock Exchange but to some extent in Government short bonds, and with them they took gold to the United States, so that in 1957 the United States reached their peak holding of 23,000 billion dollars. In the next two years Europe became a more attractive place for investment; the United States lost 3 billion dollars of gold, and in 1960 they lost 4 billion dollars. The 1960 figures are made up of a huge favourable balance of trade, almost exactly cancelled out by military and economic aid of various sorts, and an outflow of 2,000 million dollars of short-term funds and 2,000 million dollars of foreign investment left them with a minus 4,000 million dollars on total foreign payment 94 account. That was satisfied by a decline in their gold reserves.
In other words, Americans and foreigners, seeing the United States economy in the doldrums, seeing stocks selling at very high prices on Wall Street and getting a very low rate of interest on Government bonds (because the Americans were trying to stimulate their economy with low interest rates), thought Britain and Europe was a better climate for investment. This was a purely capital movement, a movement of capital moving from a "good hole" to a "better 'ole", and it was a sign of strength to the Free World because it showed that not only were there new investment fields at least the equivalent of North America but also some of the world's biggest hoard of gold was flowing back to where it came from.
The Americans did not see it in this light at all. They sent up a cry, "The dollar is in danger", and they got into a rare "tizzy". I listened with great interest to my noble friend Lord Amory on the subject of co-operation between the central bankers of the great countries. But I believe we live in a rough, tough world, and if the Americans or the Germans are going to get on the spot in international finance we cannot expect much neighbourly co-operation out of them, and we did not get it this time. Their first reaction was to take some measures which one can only call rather ridiculous. They proposed to cut down their spending on current account, for instance by shipping home the wives of their Service personnel in Europe, by spending less local currency in their N.A.A.F.I's, and so on, and inaugurating a great export drive. But they did not stop a capital movement going on at the same time, which was to buy up Ford's, which we did not want to sell in the least. That would have been a move to correct the capital movement. The others were on current account and were quite irrelevant. Since then they have rather modified those proposals, and I hope more balanced advice has influenced them.
But if these instinctive measures had been implemented, it would have had the effect of clawing back the gold through recreating a surplus on current account, and moreover the gold would have appeared free of all sorts of correspending debt liability, so that in effect the 95 United States gold pile would have been effectively higher than before while the free gold and reserves of the rest of the world would have been smaller than before. It is all to the good that the problem should have arisen in connection with the strongest currency first. If the movement had happened to be the other way, had circumstances been different, the pound would have been in very serious danger indeed, in my opinion.
Moreover, the fact that the United States authorities showed such concern over the loss of a portion of the biggest gold hoard in the world shows that indeed there must a considerable shortage of gold reserves in the world. The central bankers have been warned, and they are laying their heads together to see what they can do to make the reserves go further. Unfortunately, what I believe to be the obvious and sensible course, which is to double the price of gold, is ruled out because of the stand of the American people against it. They say that it would destroy confidence in the dollar. I think my reply to that would be, "Nonsense!" Overnight all the currencies of the world would be altered in value in terms of gold, and nobody would notice any difference the next morning. I have little doubt that the real reasons are that Russia is a producer of gold and the sterling area is the largest producer, and they do not like either of those institutions.
My Lords, I have no vested interest. I believe that approximately one penny in the pound of my income is derived from gold shares, and I am not a "stale bull" of gold shares. The alternatives are that the central bankers are exploring methods by which they are prepared to hold more of each other's currencies, either in the International Monetary Fund or in their exchange reserves. This is all very well, and it would undoubtedly make the reserves go further; but I do not think it meets the whole needs of the situation at all. It has three grave disadvantages. First of all, there is the temptation to shelve dealing in any long-term disequilibrium in a currency. It is much easier to run up a comparatively invisible debt with a central banker in another country than have to publish figures of the losses of gold reserves. Secondly, sooner or later 96 the debts "chalked up" have to be paid off either in gold or in exports. Then, it does not deal with the real problem, which is that the ultimate means of settlement, which must still remain gold, is not commensurate with the volume of world trade, let alone with the volume of potential mobile capital in the world which is increasing year by year.
The gold solution has this advantage: that not only does it deal with the present position but it would increase the annual increments to the reserves, so that the reserves would have a better chance of keeping pace with increasing trade and increasing volumes of mobile capital. At present, I have seen it estimated that about 750 million dollars worth of gold reach the reserves each year. If the price of gold were doubled it would be a much larger figure, because the production would go up as well as the doubling of the value.
I believe that we need all the methods we can to increase the liquid reserves. Though the methods of the International Monetary Fund and so on might suit some people very well, I believe that the gold solution is the only method by which we in Britain could get our reserves up to figures which would give us some freedom for manœuvre. Valuable results emerge from this because over 30 countries are gold producers—there might be more who would come in at a higher price—and most of them are undeveloped. Undoubtedly the mines would be able to afford, and would have, to pay higher wages; this would gradually percolate throughout Africa, thus increasing the purchasing power of the Africans all over that Continent. Many of their countries are gold producers. We should get a margin which we could afford to invest in selling goods on long-term credit. We cannot afford to do so at the moment because we cannot afford to postpone collecting our annual dues. But there is much trade to be done on the "never, never", and a lot of it cannot be done on any other terms.
I am going to take the liberty of reading out a list of such credits given by the Export-Import Bank for the month of February only:Spain, 8.7 million dollars, 42 years, electric power equipment.Philippines, 5 million dollars, 15 years, airport equipment.97Mexico, 13.8 million dollars, 10 years, railway equipment.Bank of Japan, 25 million dollars, 5 years, industrial equipment.Italian Government Agency, 8.5 million dollars, 7 years, Douglas jets.Veneruzia, 50 million dollars, 5 years, capital goods.Colombia, 9.5 million dollars, 7 years, Boeing jets.Chile, 15 million dollars, 5 years, United States imports.Argentine firm, 9.1 million dollars, 7 years, pulp and paper mills.If your Lordships look at the recipient countries there it is obvious that, with-out that type of credit, that business could not possibly go through. What we need more than anything else is a portion of the reserves, which we can plough into that type of business knowing that we shall get paid in future years. Our traditional railway exporters would, I believe, be particularly glad to hear of that happening.
Moreover, I think that one of the best methods of ending the cold war is to bring the Russian standard of living up to that of the West. At the moment Russia cannot afford to buy from the West as much as she would like; hence the volume of dumped oil, and so forth. An increase in the price of gold would obviously make them in a better position to buy. I believe, in fact, that the Americans in their obscuranticism over the price of gold are cutting off their nose to spite their face, because in their exports they would share an increased prosperity arising from the buying power of all the gold-producing countries and the higher wages in the backward countries, which I believe would spread round from the gold industry. I believe it necessary and desirable not only for us to push forward any mechanical method of increasing the reserves, but not to cease pressing the step which would help us in the sterling area, which is to increase the gold reserves.
§ 5.20 p.m.
§ THE MINISTER WITHOUT PORT-FOLIO (THE EARL OF DUNDEE)
My Lords, we are all delighted that my noble friend Lord Boothby has recovered so quickly from the indisposition which was reported yesterday, following on his strenuous travels, and that he has been able, after all, to come here and move 98 his Motion, in one of the most interesting speeches which we have ever heard from him, and has been able, also, to listen to the speeches of other noble Lords in this same debate. It is a very good advertisement for penicillin.
I think my noble friend has introduced this discussion on liquid reserves in the Free World at a most opportune time, for many reasons. It was not long ago that the new O.E.C.D., which includes the United States and Canada, was superimposed upon the old O.E.E.C.; and it was only last month that several European countries—Great Britain and Sweden, together with the six Common Market countries—after fifteen years of peace-time currency restriction, announced their formal acceptance of the obligations under Article VIII of the International Monetary Fund Agreement, which provides that currency deposits in the Fund shall be convertible. I believe that that will obviously have a considerable effect on the liquidity of these international reserves.
At the same time there has been the Message to Congress from the President of the United States, from which my noble friend quoted, which laid so much emphasis both upon liquidity and upon the need for enabling the Free World to give more help to underdeveloped countries. Following upon that, immediately after the middle of last month, there was the visit of Sir Frank Lee and Sir Denis Rickett, with Mr. Parsons, to Washington where they went for several days in order to discuss these matters with the monetary authorities there; and that is intended to be only the beginning of a number of routine contacts of this kind. All these questions must be, and can only be, dealt with by true international co-operation. They cannot be dealt with by 'nations acting individually.
The need for co-operation is one which we have learned painfully. I suppose that the worst foreign exchange muddle which was ever suffered by the trading nations of the world, probably in history, and certainly within the lifetime of my noble friend Lord Boothby and myself, was in the 1920s. Germany was supposed to pay, and often did try to pay, impossibly large reparations to the Allies. The Allies were supposed to pay, and sometimes tried to pay, impossibly large sums to the United States in reimbursement of, and interest on, the American 99 Debt. It should be remembered that Great Britain, which was owed over £2,000 million by Europe, and which owed less than half that amount to the United States, continually proposed that all these debts should be wiped out altogether. But our views did not meet with acceptance, and the world went on towards the crash of 1930, with its wholesale unemployment and terrible hardship and, in the case of Germany, despair which led so many people there to look upon Hitler as their only hope for the future.
Since the Second World War, the wise and enlightened creditor policy of the United States has had a very different effect, which has greatly benefited the world, and particularly all those countries which have taken part in the various economic organisations which stem in one way or another from Bretton Woods or the United Nations. Now the problem of the industrial countries of Western Europe and North America is not how themselves to escape from mass unemployment and unnecessary privation, but how to increase still more rapidly their economic growth which is developing at a fast rate; how to utilise their resources in order to give more effective help to the development of those countries in Asia, Africa and South America where people cannot fully appreciate and enjoy human liberty, until extreme poverty is removed.
Before the last war we suffered through trying to do things which were mathematically impossible, and although we are doing so much better now we still have to be careful not to make the same kind of mistakes. It is a mathematical impossibility for every country in the world to export more than it imports—unless, of course, some of the exports are thrown into the sea so that they are not imported by anybody. It is a mathematical impossibility for every country in the world to have an export surplus. And if every country in the world is determined that it must have an export surplus, so that it can accumulate greater reserves and that, failing such a surplus, it will either impose restrictions on imports or else pursue a deflationary policy, then the wealth and power of the Free World will not increase as rapidly as the wealth and power of the Communist world. We shall be unable to do our duty to those underdeveloped countries 100 which are so much more easily deceived by Communist propaganda about the extent of the very little Communist aid, and which do not always appreciate so well the reality of the far greater aid we are now giving them.
The problem of how to finance this growing volume of world trade in the 1960s is not a simple one. We must have a sufficiency of some international medium of exchange, whether it is gold or paper, or both, in order to correct the fluctuations which always take place, the temporary imbalances between one country and another as a result of one country having exported more than it usually does, or vice versa. In order to keep that balance we must have sufficient international exchange to move between the country which has exported too much and that which has imported too much, in order to keep things right until the position is corrected by the natural course of trade. The amount of this international medium—currency —which is sufficient for this purpose does not, of course, entirely depend upon its quantity. It depends also on the rapidity with which it circulates. But there is also such a thing as permanent imbalance of trade which is not capable of being corrected by increasing liquid reserves—or at least by that method alone.
There may be some particular factor which causes one country to lose reserves over a long period and another country to gain reserves over a long period. For instance, one country may be sending out a lot of unrequited exports in order to maintain large armed forces for defence, and not getting imports in exchange; or sending abroad a large amount of capital in the form of loans to undeveloped countries, which loans are not to be paid back, or are to be repaid only after a very long time. That is another kind of unrequited export. On the other hand, if some other country which has a flourishing export economy sells all its export goods to countries which can afford to pay "on the nail", that country will be more inclined to accumulate a balance so that there may be a permanent imbalance as a result.
In the last seven years the outflow of gold and dollars from the United States of America has amounted to 14.000 million dollars. As for the United Kingdom, of course we have gone up and 101 down a bit, but cumulatively we have remained roughly in balance over the same period. Germany, on the other hand, has increased her holdings in those seven years by no less than 5,000 million dollars; Italy by 2,000 million; France and Japan together by another 2.000 million. That is why Germany is now so often quoted as the most outstanding example of this present imbalance, which cannot be put right simply by increasing the amount of liquid reserves which are held by trading countries as a whole. It will have to be put right by co-operation, and it is our policy to negotiate with all countries in Europe and with the United States in order to bring about an agreement to that effect with Germany.
My right honourable friend the Chancellor of the Exchequer went to Germany last week and had discussions with Dr. Erhard on March 23. It had already been announced before that, I think at the beginning of the month, that the Germans were revaluing their currency by 5 per cent., which we had already acknowledged as a valuable action showing how seriously the Germans were taking the problem of imbalance. After the discussions of the Chancellor of the Exchequer with Professor Erhard last week, as was announced in the Press, the German Government agreed that they would repay the amount outstanding to the United Kingdom under the London Debt Agreement of 1953, which settled the debts for post-war economic assistance amounting to £67½ million, within the next few weeks. They have also agreed that they will co-operate in enlarging the resources of the International Monetary Fund by making their currency available for drawing beyond the existing quota. No amount can be stated for this at present, but there is every reason to believe the Germans will be openhanded.
Then, as regards longer-term measures, they have agreed that they will increase their purchases of arms in the United Kingdom from an annual value of about £l4 million to at least £20 million, and they have said they will not draw on the interest free arms account in London —which stands at about £25 million—but will instead pay cash across the exchanges at the dates prescribed by contract. And, in addition to the arrangement with the United Kingdom, 102 the Germans are going to make premature repayment to the Americans in respect of the debt for post-war economic assistance. They are also going to buy large quantities of arms from the Americans.
With regard to helping underdeveloped countries, they have repeated what has been said before: that Germany recognises the obligation to give financial aid on a continuing basis to the less-developed countries, and that this obligation is not affected by the revaluation of their currency. They have said that their new aid programme will provide finance which will not be tied to the export of German goods; and we believe what they have in mind will be a very significant effort.
Your Lordships may be aware that there is now sitting in London the fourth meeting of the Development Assistance Group. This Group is not specifically connected with the O.E.C.D., although all but one of the participating countries belong to O.E.C.D. These countries have been giving aid, and wish to coordinate their plans in giving more aid, to under-developed countries. The nations which are represented at this meeting this week are Belgium, Canada, France, West Germany, Italy, Japan (Japan is the only one which is not a member of O.E.C.D., but she is associated with it for this purpose), the Netherlands, Portugal, the United Kingdom and the United States of America. This is a group of the principal donor countries which have been meeting together for the past year or so to consider and consult upon some of the problems which arise from the provision of aid on a continuing and substantial scale, and this is the first meeting which has taken place since Canada and the United States joined the European countries in forming the O.E.C.D.
As for the problem of liquid reserves, with which my noble friend was particularly concerned, I should like to say how grateful I am to all of your Lordships on both sides of the House and on the Cross Benches who have contributed to the debate. I do not think I have ever before had to reply to a debate in which I found myself in agreement with so much that has been said. I think that everything which your Lordships have said, so far as I can judge at first sight, 103 has been helpful or, at least, not unhelpful to what the Government are trying to do. I am particularly grateful to my noble friend Lord Amory, who has been unable to remain, for his intervention. My noble friend Lord Amory has the most engaging and useful, although not universal, habit in your Lordships' House of giving most unqualified and impeccable support to a Government of which he is no longer a member, and I feel that he is a most comfortable man to have behind me in any debate. I feel rather like the lesser Greek warrior who was protected against the assaults of Hector by the intervention of Ajax who put his shield in between them; and, in fact, my noble friend has relieved me, I think, from the necessity of saying anything in defence of the Government's domestic economic policy in this debate, although we shall no doubt discuss the subject again later in the Session.
Many of your Lordships have made suggestions which we will gratefully note and consider. You have also called attention to memoranda or proposals by various professors. I think that all that you have said is politically uncontroversial. That does not necessarily mean that it is not capable of controversy between economists, who often attack each other with far greater venom than politicians ever think of using. But all your Lordships have said is valuable and, so far as I can see, very helpful to the Government.
I should like to congratulate my noble friend Lord Boothby, not only on his recovery of health but also on the preservation of his sanity. He may remember that eighteen months ago, when we discussed the Radcliffe Report, to which debate I had the duty of replying, he told your Lordships, as he has done again, that he was the real begetter of that Report. But he criticised the Radcliffe Report on one or two matters, one of which was the recommendation that the price of gold should not be increased. My noble friend disagreed with that; he thought that it should. In introducing this argument he said [OFFICIAL REPORT, Vol. 219, col. 532]:I promise that I have nearly finished, and will never, never mention the subject again so long as I am alive. In fact, I can tell your Lordships that the Radcliffe Report and every document connected with it is now in my wastepaper basket. This is my swan-song ",104 said the noble Lord, Lord Boothby.It is not a subject one can return to at frequent intervals and keep sane.
§ LORD BOOTHBY
My Lords, may I be allowed to interrupt the noble Earl for a moment? I had to buy another copy for the purposes of the present debate.
§ THE EARL of DUNDEE
I hope my noble friend's memory is at fault there, because, in winding up the debate, I made a special appeal to him that he should take his copy of the Radcliffe Report out of the wastepaper basket and use it for a little light bedtime reading. At any rate, he has listened to my appeal to read it again, with the result that he has changed his mind. He has inspired very many important things. He inspired the Radcliffe Report, and now, it seems, he has inspired the present economic policy of the United States.
§ THE EARL OF DUNDEE
I have done something even more important than that, my Lords: I have inspired the noble Lord, Lord Boothby, to change his mind about this, and he is now no longer in favour of raising the price of gold. Others of your Lordships have mentioned the point. My noble friend Lord Hawke behind me looked upon the possibility with a little more favour. Of course, it is a question on which a great many interesting things can be said in theory on both sides, but from a practical point of view—and I think I must look at it from a practical point of view—the question seems to be fairly well settled for the moment by what President Kennedy said the other day, because the world price of gold depends pretty well entirely on American buying and selling. The President said:We need not and we shall not take any action to increase the dollar price of gold from 35 dollars an ounce. This Administration will not distort the value of the dollar in any fashion. That is a pledge.In view of this recent statement, it does seem to me that a discussion on the merits of raising the price of gold is really an academic discussion at the present time. But since one or two of your Lordships have gone on to mention the possibility of a managed rate of exchange by this country, I think I ought to make it clear, on behalf of the 105 Government, that, in our view, experience has shown that the fixed parity provided for by the International Monetary Fund Agreement is in the best interests of a great trading nation like ourselves, and we have no intention of varying the sterling/dollar parity or of varying the present margin within which it is allowed to fluctuate—that is, 2.78 on the one hand and 2.82 on the other.
My Lords, when I came to the House at the beginning of this debate I did not know what I was going to say in reply to the debate, because I did not know what your Lordships were going to say; but one thing I had made up my mind to do was to quote a passage from President Kennedy's Message to Congress at the end of January. When I arrived, one of the first things I heard was my noble friend Lord Boothby quoting that passage absolutely verbatim, and I then thought I should not bother to quote it at all. But, having listened to your Lordships' debate, I think, in the light of what has been said, that this passage from the President's Message will bear repetition, for not only is it very important, but I think it has significance in the light of everything that has been said in our debate this afternoon. He said:Increasing international monetary reserves will be required to support the ever-growing volume of trade, services and capital movements among the countries of the Free World. Until now the free nations have relied upon Increased gold production and continued growth in holdings of dollars and pounds sterling. In the future, it may not always be desirable or appropriate to rely on these sources We must now, in co-operation with other lending countries, begin to consider ways in which international monetary institutions — especially the International Monetary Fund—can be strengthened and more effectively utilised, both in furnishing needed increases in reserves, and in providing the flexibility required to support a healthy and growing world economy. I am therefore directing that studies to this end be initiated promptly by the Secretary of the Treasury.It was in order to discuss the issues which are raised by that passage that Sir Frank Lee and his associates went to Washington a few weeks ago, as the beginning, as I have pointed out to your Lordships, of a series of direct contacts.
My Lords, in all these matters the policy of the Government is to do our best to co-operate with other nations in the Free World for the common good. Problems may change—some of them 106 may be solved and others may not—but discussion, I think, must always go on, because agreement on economic policy is vital to the Free World. I think your Lordships will agree that we should not be obstinate in pressing one particular method if there is some equally good alternative method which is more likely to be acceptable to our friends. The objects which are expressed in my noble friend's Motion—that is, economic growth of the Free World, an increased volume of international trade and, particularly, the more rapid development of emergent territories—are all primary aims of Government policy which we shall pursue with all perseverance and in which we have every hope of success.
§ 5.46 p.m.
§ LORD BOOTHBY
My Lords, I am most grateful for the reception which your Lordships have given to my Motion. I am afraid the noble Earl, Lord Dundee, has never found me, and is unlikely ever to find me, as comfortable a man behind him as he described my noble friend Lord Amory; but I think I am more comfortable on his right than I was when I was sitting behind him. At any rate, my Lords, I feel much more behind Her Majesty's Government's policies since I diverted to the Cross-Benches than ever I did during the many years that I sat behind them.
I think there has been an astonishing measure of agreement in this House today about the very considerable problem which we have been discussing. I should like to say to my noble friend Lord Dundee that I myself have not changed my mind about the question of the price of gold. I still think that to raise the price of gold would bring an immediate, although necessarily a temporary, alleviation of the problem which confronts us. But as the only people who can raise the price of gold are the Americans, and as two recent visits to the United States have convinced me that they have not the slightest intention of doing so, I have abandoned the idea that we should raise the price of gold, and have turned to the other alternatives which I ventured to express to your Lordships this afternoon. I think we are all agreed that gold itself should no longer be a tyrant in omnipotent control of the world's economy, but should be put in its proper place and used for its proper purpose, which is that of settling 107 international differences. I think we are also agreed that there must be discussions about the general question of the problem of international liquidity, and about the future of the International Monetary Fund.
My Lords, I should like to refer particularly to the dislike expressed by my noble friend Lord Robbins of the possibility of an immediate International Economic Conference. I would point out that my suggestion was not for that. I suggested that there should be consultations first of all between the United States Government and ourselves, and, secondly, with the International Monetary Fund, as to what should be done. It was thereafter, and on any recommendations that the I.M.F. might put forward—after, I hope, an examination of the proposals of Mr. Bernstein—that we should have an international conference. Having said that, my Lords, I beg leave to thank your Lordships, and to withdraw my Motion.
§ Motion, for Papers, by leave, withdrawn.