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The Economy

Volume 35: debated on Wednesday 19 January 1983

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4.28 pm

I beg to move,

That this House, recognising that a competitive exchange rate is essential for Britain's recovery, condemns the gross mismanagement by the Government of its economic policies, particularly its exchange rate and interest rate policies; believes that these have greatly contributed to the collapse of Britain's industry and to the massive increase in unemployment; and calls upon the Government, as part of a new strategy to get the country back to work, to reverse the recent increase in interest rates and to reduce Britain's vulnerability to speculation by the immediate reimposition of exchange controls.

After last week's events it is only natural that in addressing the House I should point my remarks more to the Prime Minister than to her Chancellor. Like all her predecessors, the right hon. Lady is First Lord of the Treasury, but few Prime Ministers have intervened more extensively or taken more direct responsibility, at least until things go wrong, than the present Prime Minister, and few Chancellors have played so subordinate a role as the present incumbent.

While fever raged in the money markets last week, the Chancellor was so invisible and so inert that many of us thought he was spending the Christmas recess in a trappist retreat. Not a word or, in the presence of my right hon. Friend the Member for Leeds, East (Mr. Healey), not a bleat, not a sign of life came from Great George Street, except a daily drip of unattributable briefing for the media. The line was, "Do not blame us, we are only the Government; blame the Opposition instead."

It was left not to the Chancellor of the Exchequer, but to the Paymaster General, who by some happy coincidence is also the chairman of the Conservative party central office—the Prime Minister's chosen man—to break the eerie ministerial silence and to put in public what he believed, had he been able to telephone the Prime Minister in the Falklands or to communicate with the trappist Chancellor of the Exchequer in London, was the Government's general line.

Then on Thursday the Prime Minister returned, and within hours the Chancellor of the Exchequer was dispatched to the microphone and he found his tongue. But it was the Prime Minister, again on Saturday and then in a long interview on "Weekend World" on Sunday morning, who shouldered the task of stating the Government's position and intent. It is on what she had to say that I wish first to focus.

Those who saw it will, I am sure, agree that it was an astonishing and revealing performance and wholly relevant to the debate. In the course of her prolonged exchanges-40 minutes of which were devoted to the economy, covering the exchange rate, interest rates, short-term and long-term economic policies and goals—the word "unemployment" left her lips just once. What did she say about it? She said:
"as far as the costs of reducing inflation further are concerned, I think provided wage increases are below the current level of inflation, you need not have more unemployment".
There we have it. In short, if living standards are not held but actually cut, unemployment need not increase. All over Britain the scourge of unemployment has returned.

Three and a half years ago we were told that Labour was not working. Today, having helped to destroy 2¾ million jobs, having reduced the work force to the levels of 1950, having one in seven of our working people on the dole, having turned much of Britain into an industrial wasteland, having blighted the hopes of the young and having brought despair to the over-fifties, the Prime Minister cannot muster one word of concern or compassion. She gives no hint of recognition of the moral and social outrage that is involved. She accepts without question that her goal is not to reduce the 3½ million unemployed now or in the years ahead. In all this the Prime Minister has revealed her own values and her basic philosophy.

Two years ago I drew attention to another equally revealing speech that she delivered in St. Lawrence Jewry in the City when she described inflation as an evil and unemployment as a problem. It is this, of course, that leads her to over-value property and under-value people.

When taxed by Mr. Walden on the issue of maintaining the jobless and providing services for them and their families, the Prime Minister gave it as her view that it was the duty of the state to provide no more than a safety net—an assertion followed by a laudatory outburst on the virtues of private charity, of the Victorian pre-welfare state, of the "benefaction feeling" of the rich, who provided voluntary schools, voluntary hospitals, town halls and, yes, even prisons.

Yes, and soup kitchens.

What a view of the past. What a view for the future and what a threat. This is the moral and intellectual soil in which the notorious Cabinet Think Tank report last September was sown, with all its proposals for reducing pensions, dismantling the National Health Service, introducing school fees and imposing the obligation to repay loans upon recipients of university and higher education.

At the heart of this debate is the economic decline of Britain over which the Government have not merely presided but have so perversely engineered. Among the instruments of deflation that the Government have employed to flatten our economy—increased taxation and cuts in public expenditure—none has had a more malign effect than the Government's interest and exchange rate policies.

I do not think that there can be much argument or dispute that, throughout the period of this Government, we have had a serious over-valuation of the pound. Between May 1979 and January-February 1981 the pound was encouraged to rise to what at the time and in retrospect can be seen as a truly astonishing level. At the peak, in early 1981, the pound had appreciated by no less than 19·3 per cent. against the basket of other currencies and by no less than 16·5 per cent. against the dollar. Did this appreciation affect the increased strength or competitiveness of the British economy? Not at all. It rose because, in the fanatical pursuit of his money supply targets, the Chancellor shoved up the interest rate to 15 to 17 per cent. for a whole year. Capital then flowed into Britain.

Was there competitiveness? The very opposite. Our competitiveness, measured by the International Monetary Fund's index of relative normalised labour costs, fell by no less than 50 per cent.—a change in magnitude and over a timescale quite without precedent in this century. We all know what happened to industry in the following year. There was a collapse, with unemployment jumping by over 1 million in 12 months.

It was these events that provoked Dr. Otto Emminger, in his evidence to the Select Committee on the Treasury and Civil Service as recently as 25 October 1982, to say:
"the pound sterling rose against a group of important currencies on a trade-weighted basis between 1978 and the first quarter of 1981 by 25 per cent. in nominal and by 37 per cent. in real terms."
He went on to remark:
"This is by far the most excessive over-valuation which any major currency has experienced in recent monetary history."
Between the peak in early 1981 and the beginning of November 1982 sterling depreciated by 10·4 per cent. against the basket of currencies and by over 30 per cent. against the dollar. Over the same period our relative normalised labour cost dipped from 56 per cent. above its earlier level to 41 per cent. It was this latter figure, this slight improvement, that the Chief Secretary and others triumphantly acclaimed as evidence of greater productiv-ity, greater efficiency and success for the Government's incentive and supply side policies.

As recently as 9 December the Chief Secretary boasted in the House of an increase in competitiveness of some 20 per cent. When I said that it was due surely to the 10 per cent. depreciation of the pound, he claimed that the vast majority of the improvement had nothing to do with the exchange rate. Since then he has written to me to correct himself. In answer to a question put by my hon. Friend the Member for Blackburn (Mr. Straw), he has been forced to concede that 75 per cent. of that modest improvement was due to currency depreciation.

That brings me to the third and most recent phase of the sterling story—the phase that began in early November following the publication of the Chancellor's economic forecast. That showed not only that the long heralded upturn was likely to be at best fragile, if not derisory, but, far more important, that the great benefit of North Sea oil that had provided us with such substantial trade surpluses in 1981 and again, although to a markedly reduced extent, in 1982 was due to vanish in the course of this year. Thus, the Government, in the middle of a most serious slump, when imports are inevitably low and in spite of the £40 billion contribution that North Sea oil has made to the British economy in the past three years, were operating the economy with such crass incompetence that we are heading for a deficit by the end of this year. On top of that, there were much publicised fears, which continue, that oil prices could well fall and are certainly unlikely to rise.

What happened then will be within the recollection of the House. The exchange rate fell. The Chancellor rushed to the House on 18 November to reassure the money markets of the world that all was well and that the Government would maintain, as he put it, firm monetary conditions, and that his policy of allowing the exchange rate to reflect market forces was unchanged. Asked by myself and by my right hon. Friend the Member for Heywood and Royton (Mr. Barnett) for an assurance that this really was his policy and that he would not seek to reverse the market trend by raising interest rates or by seeking to prop up the rate through other means, he replied categorically:
"I shall not depart from my policy on the exchange rate … I shall allow it to be regulated by market forces."—[Official Report, 18 Novembr 1982; Vol. 32, c. 418.]
Of course, he did not so allow it. He did just the opposite. Ten days later, the commercial banks were permitted to raise their interest rates by a full 1 per cent. Then, throughout December, as we learnt when the gold and dollar reserves were published on 5 January, no less than £500 million was drawn from the reserves by the Bank of England to prop up the rate. It was then, of course, that the markets began to panic. The Chancellor was nowhere to be seen. On 10 January the second folly was committed when the Bank of England failed to prevent the commercial banks putting up their interest rates yet again by a full 1 per cent.

In eight weeks, there has been a two per cent. increase in bank rates, a depreciation of sterling by 12 per cent. and a loss to the reserves, taking November and December together, of $1 billion. Of course, the Chancellor would like to find some excuse. After all, that has been the Government's style since they came to office. In 1979ߝ80, the shooting up of inflation to 22 per cent. at an annual rate was due not to his doubling of VAT or to his other price increase measures, but to inherited pay settlements. The collapse of competitiveness was due not to his interest rate and money supply policies—17 per cent. at the peak—but to irresponsible pay claims. The appalling rise in unemployment was due not to the lethal combination of his massive increase in the tax burden, his cuts in public expenditure and his high exchange rate, but to the international recession.

So it goes on. The Chancellor has refused to acknowledge, let alone face, the disasters that his policies have inflicted on the British economy and people. He has been stripped by events of all credibility on the crucial matter of the much vaunted and long heralded upturn in the British economy. Only last May, the Chief Secretary to the Treasury was seeing signs of recovery all around him. Driven to accept that the one tiny "success"—I use inverted commas—that he might still be able to claim is a reduction in the rate of inflation, the Chancellor and the Prime Minister have doggedly resisted any change in the exchange rate, however necessary they have known it to be.

If change has come, it is in the judgment of domestic and international opinion and markets. If the judgment is that the Chancellor has failed and the absurdities of his monetarism have been rumbled, it must be the Opposition, with all their vast command over events, who are to blame. It is pathetic. I do not usually quote journals. I should like, however, to invite the Chancellor to read the current issue of The Economist with its direct and truthful statement that
"the principal reason for sterling's fall this week was simply that it was over-valued."
If the Chancellor wishes to know the view abroad, he should read the January bulletin of the Morgan Guarantee Trust Company of New York which states that
"over the first three quarters of 1982, there was no further recovery in competitiveness"—
referring to the United Kingdom—
"thus the real exchange rate remained crippling for many British firms."
Even the Chancellor must surely have read the successive pleas of the CBI in pre-Budget submissions. In February 1981 the CBI stated—its words were prophetic—that
"unless the exchange rate comes down there is a danger that companies will be forced to withdraw from markets on a large scale and to dispose of plant and equipment, management, skilled labour and sales organisations. Equally important, they will not be able to invest in the up-to-date capacity, research and development needed to meet intensified competition a few years hence. The CBI therefore calls for a declaration that the Government understands the need for a lower exchange rate and will seek to achieve it"
A year later, in February 1982, the CBI was saying that
"with present exchange rates, even with no rise in United Kingdom unit labour costs, it would take five years to bring labour cost competitiveness back to the 1975 level. To improve competitiveness, the success of businesses in controlling their labour costs ought to be backed up by further falls in sterling, particularly against European currencies."
As recently as 16 December the CBI published its preliminary survey of the industrial opinion of its members under the heading:
"Fall in pound will benefit output and profits."
The survey stated:
"Industry's output is likely to benefit significantly from the depreciation of sterling through higher exports and some improvement in domestic sales as firms are able to compete more successfully against imports."
I do not apologise for concentrating on the exchange rate. A realistic exchange rate is not a sovereign cure for all our ills, but it is a pre-condition for recovery. Everyone knows why. An over-valued exchange rate is simply a tax on Britain's exports and, at the same time, a subsidy to foreign importers. It is a self-inflicted wound—one that we are no longer strong enough to bear. There has been only one other period this century when we have punished ourselves with a similar folly. That was in 1925 when we fixed sterling against gold at its 1914 parity. A year later, we had a general strike and a major recession.

What does the right hon. Gentleman think would be an appropriate exchange rate today for the pound against the dollar? Is he still asking for a 30 per cent. devaluation, or is it only 15 per cent. now?

I shall come precisely to these exchange rate questions including the detailed ones. I shall put them and make my point within the framework of asking questions myself, because both the Chancellor and I, in a sense, have to deal with them. These will include some of the questions I mentioned in a speech at the weekend intended for the Prime Minister, together with some additional ones. I hope that the Chancellor will answer them during his speech. Is he aware that the pound, after he had pushed it up by 19 per cent. in his first period of office, has depreciated, in the two years since January 1981, by just on 22 per cent.? Has the right hon. and learned Gentleman, in the Prime Minister's words last Sunday, been totally irresponsible—or simply income-petent? Has he noticed that the rate of inflation has not increased but has fallen during this period? Does he believe that the most recent fall in the exchange rate—the 12 to 13 per cent. that has occurred in the past two months—is beneficial or harmful to Britain?

Before he answers that question, the Chancellor should remember what was said when Mr. Brian Walden asked the Prime Minister whether she regarded the recent fall in the value of the pound as having been a bad thing. What did the Prime Minister say? She said:
"you cannot hold what is a fundamentally wrong value of your currency in relation to someone else's performance … so I am not surprised at that change because it goes to the fundamental thing, the underlying industrial performance."
Did the Chancellor note the reply that was given during Question Time on Monday by his hon. Friend the Minister for Industry and Information Technology:
"The recent sharp drop in the value of sterling—it has dropped against the deutschmark and the French franc by about 12 per cent. in 10 weeks and by about 19 per cent. against the yen—will improve the competitive position of many British manufacturing firms that export."—[Official Report, 17 January 1983; Vol. 35, c. 10.]
If the Chancellor still thinks that a 12 to 13 per cent. depreciation is harmful, is it his purpose to regain the 13 per cent.? If so, how does he intend to do it?

If the Chancellor believes that the exchange rate movement is beneficial, does he consider that the attacks that the Prime Minister, his colleagues and he have launched on the City and on the Labour party recently are just so much electoral humbug? Does he intend to maintain his publicly stated stance of leaving the exchange rate to be determined by the market, or does he intend to respond to the next flurry by pushing up interest rates yet again?

As there is no reason to believe that Britain's productivity is rising or will rise faster than that of its competitors, what is the right hon. and learned Gentleman's policy for restoring the still substantial loss in our international competitiveness? Is not that policy the barren, cruel and strife-ridden course of attempting to enforce not pay moderation but continuing real cuts in the wages, salaries and standards of living of our fellow countrymen?

Will the right hon. Gentleman clear up one point? He referred to the disastrous decision in 1925. It is certainly seen in retrospect to have been disastrous to fix the value of the pound sterling. Does he agree that those disasters would have been largely avoided if the pound sterling had fixed its value in the market instead of being permanently and deliberately kept rigid by Government?

I am certain that Britain benefited enormously in 1931 when we severed the link with gold. I would not go as far as the right hon. Gentleman in arguing that in all circumstances it is better to have a completely floating exchange rate system rather than a sound one of international guidance and regulation. That is where the right hon. Gentleman and I differ.

In the light of experience, does the Chancellor agree that it was a crass error to abolish all controls on the movement of capital and domestic savings out of Britain? Is he aware that the exodus of capital has been £10 billion a year since 1980? Is he not ashamed that the total capital investment in manufacturing industry in his own country is now far smaller than the flow of British money overseas? Does the Chancellor agree that, as we are now utterly defenceless against speculation, he has a bounden duty to restore the small but effective apparatus of control that was introduced by Neville Chamberlain in 1939 and was sustained by Sir Winston Churchill, Harold Macmillan, Sir Alec Douglas-Home and the right hon. Member for Sidcup (Mr. Heath)?

Will the right hon. Gentleman explain how exchange controls assisted the Labour Government in 1976? What did they do that the IMF did not have to do for them?

No one will claim that exchange controls are an iron-clad system. If the hon. Gentleman is serious about the matter, he should examine the net export of capital from Britain between 1974 and 1979 and during the period following the abolition of exchange controls. There is no comparison.

What has the Chancellor to say about yesterday's publication, which appears in this morning's papers, of the index of industrial production? Those figures show that in November industrial production as a whole, and manufacturing output within it, fell to its lowest level yet—manufacturing output being no less than 3 per cent. down on the miserable level of 12 months ago.

There should be no doubt where the Opposition stand. We believe that the central objective of national economic policy is to create wealth, to expand output and to reduce unemployment. We believe that those objectives can be achieved only by policies of expanding demand, achieving competitiveness and far-reaching measures at company and industry level to restore the shattered supply side of the British economy.

We believe that not only was the exchange rate adjustment inevitable, but that, if the opportunity it offers is used, it will be of great benefit to Britain. It is perverse and wrong to attempt to prop up an uncompetitive rate by raising interest rates.

We intend that interest and exchange rates should serve the interests of our industry and people and that they should not be determined by exploded theories about the paramount importance of the money supply. We shall reintroduce exchange control and see to it that the savings of the British people are used to strengthen the economy of the country to which we all belong and from the prosperity of which individual prosperity is, in the end, derived.

4.57 pm

I beg to move, to leave out from "House" to the end of the Question and to add instead thereof:

'notes that Government spending and borrowing are firmly under control and that inflation in the United Kingdom fell more in 1982 than in any other major country; rejects the reimposition of exchange controls and welcomes Her Majesty's Government's determination to maintain policies needed to combat inflation, and hence encourage growth and employment on a secure and sustainable basis.'
The right hon. Member for Stepney and Poplar (Mr. Shore) was curiously coy about answering the question that my right hon. and learned Friend the Member for Hexham (Mr. Rippon) asked him. Throughout his speech, he showed how, ever since he published the programme for recovery of 23 November on behalf of his party, he has tried to dissociate himself from its natural implications.

The press and everyone else who studied what the right hon. Gentleman said and wrote concluded that he was then prescribing a devaluation of the pound sterling by 30 per cent. So, at the time, did the right hon. Gentleman. In an interview on radio with Sir Robin Day the right hon. Gentleman reasserted what was plain from his document—that the only realistic way for Britain to recover was to bring about a realistic exchange rate. He talked specifically about a 15 per cent. devaluation in the first year and another 15 per cent. devaluation in the following one.

That is how the right hon. Gentleman's programme was interpreted. He notably failed, when presenting a rather guarded form of his prescription today, to answer the key question that he will face if he achieves that devaluation. He had nothing to say about the relationship that he would advocate between devaluation on that scale—supposing that he could achieve it—and the movement in pay and earnings that would accompany it. We would surely be entitled to conclude that his prescription for a devaluation of 30 per cent. was likely, on his analysis, to have a significant impact on inflation. We would be entitled to ask within the question—it is important that he answers it—what prescription he would then offer in relation to pay alongside such a devaluation if he could achieve it.

Before the right hon. and learned Gentleman invites me to answer those questions, will he answer my question about what the implications would be for both prices and incomes policies of his depreciation of 12 per cent. during the past two months?

Perhaps the right hon. Member for Stepney and Poplar will allow me to get beyond the first four words of my reply before interrupting. The right hon. Gentleman delivered a positive fusillade of questions in his speech. I had hardly begun to address the House when he leapt to his feet to ask another question. I shall address myself to his questions in due course.

If the right hon. Gentleman is serious in proposing a 30 per cent. devaluation of the pound sterling, that poses the most serious accompanying question. What does he wish to happen to wages alongside that change? His speech—[HON. MEMBERS: "Answer."] I shall make my speech in my own way and answer the questions when it is appropriate to do so. The curious thing about the presentation of the right hon. Gentleman's case—not only this afternoon but throughout recent months—is that he appears to be inviting the House to believe at least three contradictory propositions. He would have it believe that until November of last year the level and stability of sterling at that time was in itself bad, and that a major fall was therefore desirable. Yet he comes before the House today seeking to argue alongside that that the fall that has since taken place, although well short of his prescription, is nevertheless the signal for some economic crisis, which justifies his motion.

The right hon. Gentleman argues that the Government should have prevented the market from raising interest rates in November and again this month. There is a particular effrontery about that charge because interest rates stand 5 per cent. lower than in the autumn of 1981. They stand undoubtedly lower than they would have had the Government not pursued a consistent policy of holding down their spending and borrowing programme. They stand massively lower than they would if the right hon. Gentleman ever had the opportunity to introduce his foolish policies.

Does the right hon. and learned Gentleman agree that real interest rates in relation to inflation are higher than they were in 1981?

The right hon. Gentleman knows well that during the conditions—[HON. MEMBERS: "Answer the question."] The right hon. Gentleman has returned to an economic debate following a long absence, and must contain his impatience and refrain from uttering "Answer the question" after the first four words of my reply.

Real interest rates are high, and have been high in recent times around the world. That is because of the high uncertainty that still persists about the pace at which the world is making progress against inflation. I wish to take this opportunity to draw the attention of the House to those features that are of importance to our present economic position.

The picture painted by the right hon. Member for Stepney and Poplar was, as usual, wildly distorted and selective. Government spending and borrowing are under control and on target, and will remain so. Public expenditure plans for 1983ߝ84, published in the autumn statement, show a reduction in public spending in cost terms and as a proportion of gross domestic product compared with the plans for 1982ߝ83. Spending in the current year is likely to be below the planned figure and so, too, is borrowing. In the autumn statement we indicated that the public sector borrowing requirement this year was likely to be £0·5 billion below the Red Book estimate of £9·5 billion. Present indications are that the reduction on the Red Book estimate may be rather greater than that. The Government deficit as a percentage of GDP is, and will continue to be, one of the lowest among industrialised countries.

Monetary policy is also on course. Since February, the start of the current target period, all the main measures are within their target ranges of eight to 12 per cent. and fiscal and monetary discipline are demonstrably bringing results. During the past year inflation has been falling throughout the industrialised world but nowhere has it fallen faster than in the United Kingdom.

At the time of my Budget statement I suggested that we might hope to see inflation down to nine per cent. by the end of 1982. In my autumn statement I spoke of 6½ per cent. It is now plain that both those forecasts erred on the side of caution. I suspect that the December figure will prove to have been below six per cent., compared to 10 per cent. at the end of 1981. The November figure was already lower than for a decade, and only a quarter of the level that inflation reached when the Labour party was last in office.

Of course, sterling's recent fall will have some effect on future inflation levels, but, as I shall explain in a moment, not nearly as much as some appear to think, and much less than the Leader of the Opposition appears to hope. The Government's determination to bring down the rate of inflation is undiminished. Progress in recent months has been faster than was forecast, and may in consequence be rather slower in the months ahead, but we shall continue to experience the benefits of sound financial policies.

With falling inflation we have also seen improving efficiency and more common sense on wages and productivity. Productivity in the United Kingdom is up by 13 or 14 per cent. since the end of 1980, and is rising faster than among our partners in continental Europe.

Unit labour costs are now rising by only about 5½ per cent. a year—below the rate in most of our major competitor countries. They need to come down further, but the House should welcome the solid progrees that has been made.

Exports have held up better than many expected, and we continue to run a substantial current account surplus. That is another area where the autumn forecast is proving over-cautious. While the nation maintains a responsible approach to pay bargaining—and settlements need to come down still further—we can hope to maintain our share of a world market that should expand again in 1983, after falling in 1982.

Of course, it takes time for all the results of sound policies to come through. If there were a short-cut route, identifiable in any country, consistent with sound policies, to reduce the current tragically high unemployment figures, the Government would be the first to take it. But experience demonstrates that there is not, and it is only by pursuing sound policies that we can hope to reverse the upward trend in unemployment that has lasted for so long in this country, and which is manifest—and the House cannot escape this disagreeable fact—throughout the industrialised world.

Unemployment is more than 10 per cent. in the United States and Canada, as well as here. In Germany the figure has doubled in three years, stands at more than 2 million, and is rising faster than here. When the right hon. Gentleman pretends that the problem of unemployment is ours alone, and that an easy solution is on offer, he does the unemployed a grave disservice.

Only by continuing to deal with the deep-seated malaise in our economy, by continuing—as he would agree—to work for improved competitiveness, so that we pay our way in the world, and by continuing the battle against inflation, can we offer a sustainable prospect of higher future employment.

The November industrial production figures are disappointing, but the autumn statement foresaw a fall in the second half of 1982. The prospect for 1983 is still one of modest recovery in world trading activity, and some improvement in United Kingdom manufacturing output as a result of the improvement that we have already seen in the underlying competitive capacity of our manufacturing industry.

If we look beyond our shores, we see that in the past two years industrial production in the major OECD countries has fallen by 6 per cent. whereas in this country it has risen by 2 per cent. In the same period manufacturing production in Canada and the United States of America fell by 14 per cent. and 10 per cent., but in the United Kingdom, on a consistent basis, by only 2 per cent. Of course the fall here started earlier, but the long-standing weakness of our economy was far greater than that of any other. OECD experts now expect output in this country to grow slightly faster in 1983 than the average of the other major European economies. In condemning a rise in output of only 0·5 per cent. in the United Kingdom last year the right hon. Gentleman would do well to remember that output for the whole OECD area is estimated by the OECD to have fallen by 0·5 per cent. during that period.

The Chancellor is raping statistics with the figures that he has quoted. During the period of this Government none of the major seven Western industrialised nations has suffered a greater decline in industrial production than the United Kingdom. Between the middle of 1979 and the middle of 1982 each of our major industrial competitors showed some growth in gross domestic product. Only Britain showed an absolute slump in national wealth. Only in Britain was national wealth destroyed.

Only Britain had accumulated such problems of declining competitiveness—problems to which the Labour party was properly ready to draw attention when in office. Only in this country were two or three times as many people working in production as could have produced output on terms competitive with other countries. When this country entered the international recession its economy was suffering from more longstanding faults than that of any other country. It was bound to suffer sooner and more substantially than any other country.

It is equally true, however, that output has been falling in this way in almost every industrialised country. Our problems have an international background. That is one of the reasons why I attach so much importance to the part that I shall have to play in the weeks immediately ahead as chairman of the interim committee of the International Monetary Fund, and why I totally reject the suggestion in the amendment of the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) that there is anything "narrowly nationalist" in the Government's approach to economic issues. The right hon. Gentleman may choose to take that view, but my election as chairman suggests that other Governments do not.

Second time of asking. The right hon. and learned Gentleman was blackballed the first time.

The right hon. Member for Leeds, East (Mr. Healey) can always be relied upon to make a cheap and unworthy point.

The immediate tasks for the interim committee are to enhance the authority and the resources of the international financial institutions so that they can provide support, under suitably firm conditions, for the worst affected debtor countries—mainly, but by no means exclusively, in the developing world. That was one of the principal items on the agenda of the meeting yesterday in Paris, which I attended, of the Finance Ministers and bank governors of the Group of Ten industrial countries. I should like to report briefly to the House on the proceedings of that meeting.

Reviewing the world economic outlook, we saw the prospect in 1983—in varying degrees in different countries—of building on the progress made in reducing inflation and interest rates to cultivate the opportunity for sustainable recovery of activity and employment. In that context, the importance of maintaining sound monetary and fiscal policies was emphasised.

We were particularly concerned about the threats to recovery posed by the prevalence of large sovereign debt problems—another part of the unhappy legacy of the inflationary 1970s. We agreed on the need for close cooperation between the IMF, debtor countries, creditor countries and the world banking system. The Group of Ten countries were able to agree on an important contribution that we could make at this stage towards strengthening the resources of the IMF for handling such debt problems. We agreed, subject to legislative approval, to enlarge the so-called general arrangements to borrow by increasing the potential credit available from 6·4 billion special drawing rights to 17 billion special drawing rights—that is about $19 billion—and making it available to finance support for other countries as well as Group of Ten members. I am placing a copy of the communiqué in the Library.

I am sure that the House will welcome this important step by the world's leading industrial countries which I regard as a valuable contribution to the wider arrangements to reinforce IMF resources, which I hope will be achieved at the IMF interim committee meeting that I shall be chairing in Washington on 10 and 11 February.

The central point of the speech of the right hon. Member for Stepney and Poplar concerned recent movements in the sterling exchange rate and his views about domestic interest rates. In considering these movements, it is important to bear in mind that the Government's financial and monetary policies are being maintained, that our commitment to sound money should not be in doubt, and that for the reasons that I have given the financial position is demonstrably good. That is why the inflation prospect remains good.

The fall in sterling of more than 10 per cent. in effective terms since October, however, deserves further examination. The first point from which there can be no escape is that irresponsible policy statements by the Labour party have not helped the situation. Indeed, the extent to which the right hon. Gentleman sought to qualify and withdraw from those statements makes that clear. Some people in the market place, however few, have begun to hedge against the possibility, however remote, that those capable of such statements might some day have to exercise the responsibilities of office. I hope that the right hon. Gentleman and his friends will in future weigh their words more carefully, because Oppositions, too, have responsibilities—even those destined to remain per-manently in Opposition.

Of course, that is not the whole story.

Will the Chancellor answer this simple question? Do the Government welcome the fall in the sterling exchange rate in the past few weeks?

I shall deal with that point in explaining and setting out our views on that issue. In recent months there has been a period of turbulence in all the world's exchange markets. A general currency realignment has been taking place. Since the beginning of November the yen has strengthened against sterling by some 21 per cent. and the deutschmark by 12 per cent. Against the dollar, the change has been about 6 per cent. The deutschmark and the yen have also been rising against other currencies. There is nothing surprising about that. Indeed, it was long expected, given the underlying strength of the German and Japanese economies and their improving trade balances. A further factor has been uncertainty about world oil prices and what OPEC policies for the future may be.

Such periods of turbulence obviously tend to create a sometimes understandable nostalgia for the old and, in retrospect, simpler regime of fixed exchange rates and the Bretton Woods system. But the very factors that create the disturbance are precisely those that make a return to fixed rates impractical, especially for a major international currency such as sterling, which cannot be immune from strong market pressures.

The amendment of the right hon. Member for Hillhead shows that his nostalgia takes the form of urging sterling's early membership of the EMS exchange rate arrangement. I appreciate that that is a seriously argued case that deserves examination. I make two points about it. First, we should all like to see a return to greater currency stability. That was agreed as a desirable objective at last year's Versailles summit. It was also agreed, however, that the way to such stability must be through greater convergence between the world's main economies, both in policies and in economic circumstances, and particularly through closer convergence towards lower and more stable inflation. There is no short cut or substitute for that.

Secondly, sterling and the deutschmark are internationally held and traded on a far greater scale than other EMS currencies and sterling's petrocurrency status means that world events can cause sharp movements in the sterling-deutschmark rate. I have to say that there is little in recent events to suggest that the conditions yet exist in which sterling's full membership of the EMS margins arrangement would constitute a sensible step either for Britain or for the system as a whole.

One role for national authorities in the type of situation which has obtained worldwide since the autumn is to try to smooth sharp fluctuations and maintain orderly market conditions. That was, of course, done in this country, in December, as it has been done before and as it would be done again if the need were to arise in the face of sharp movements in either direction. But no authorities could or should try to stand in the way of currency movements that are reflecting underlying economic factors. It would not make sense for the United Kingdom or even the United States authorities to try to order the yen and the deutschmark not to appreciate. Such a course would be hardly less implausible than that which the Leader of the Opposition has quite wrongly imputed to the Government, with his suggestion that for much of 1982 we contrived, in some magical fashion, to keep sterling artificially high in order to enjoy an inflation benefit. This is not, of course, to say that the Government can be indifferent to exchange rate movements, because they are important for the economy, for inflation, and for industry. The Government have long made it clear that the exchange rate is taken into account, alongside the monetary aggregates, in assessing monetary conditions, and in assessing the Government's attitude to interest rates.

The disturbance in the markets around the turn of the year did, as I have said, owe something to fears, however unjustified, that the Opposition might conceivably be called upon by the electorate before long to put their inflationary policies into effect. And in the turbulent market conditions last week, the markets took interest rates higher. To have resisted that move could have been interpreted as a weakening of the Government's resolve.

We have shown that there was no question of any lack of resolve—[HON. MEMBERS: "What resolve?"]—our resolve to maintain economic and monetary policies consistent with effective policies against inflation and consistent with the maintenance of sound money. There can be no doubt that there is no reason for a further rise in interest rates now. If the exchange rate were to fall further, such a fall could well be only temporary, and those tempted to speculate on that could come to regret their action.

I shall not give way. I have given way many times.

The underlying inflation prospect is still good. It has been suggested that a depreciation of the type that has taken place might, if it persists, add 2 to 3 per cent. to the RPI after 12 to 18 months. For a number of reasons that is much too pessimistic a view.

First, a fall in the exchange rate will have a lasting effect on inflation only if it results from unsound money. That would, of course, be the case if the policies advocated by the right hon. Member for Stepney and Poplar were put into practice. But, as I have repeatedly said, the pursuit of policies for sound money will ensure no lasting effect. Secondly, to the extent that the depreciation of sterling discounted in advance a possible fall in the price of oil, its effect on domestic inflation could prove broadly neutral.

Thirdly, commodity prices generally remain weak.

Fourthly, competition for export markets makes it likely that exporters to this country will try to maintain the sterling price of their product by reducing their profit margins.

So right hon. and hon. Members on the Labour Benches are wrong to suggest that the recent change in the exchange rate heralds a significant reversal of progress against inflation. The country knows that it wants to achieve further progress in that direction. It appreciates the progress that has been made and provided the gains in competitiveness—those already registered and those resulting from depreciation—are not dissipated, provided we see continuing moderation in the level of pay settlements, that progress should be maintained.

The right hon. Member for Stepney and Poplar sees the resolving of our competitiveness as a simple matter. He appears to see at the heart of his programme for the improvement of competitiveness a substantial fall in the exchange rate. Let me give him this rather grisly assurance. A fall in the exchange rate is about the only thing the election of a Labour Government could guarantee, and on a scale far greater, and far more rapid, than his 30 per cent. The right hon. Gentleman's problem would not be to engineer a fall in sterling, but to stop it. What would be the result if he were able to secure that policy for the destruction of the exchange rate of the pound? Has he forgotten that from 1969 to 1976 sterling depreciated by more than a third in effective terms or, to take a narrower period, between February 1975 and November 1976, by 25 per cent?

What happened as a consequence of those changes? Competitiveness scarcely improved at all because costs, especially wage costs, rose to destroy any competitive advantage that might have been secured. That is the importance of the question that I put to him at the outset of my speech. How could he ensure, if he secured devaluation on that scale, that the competitive advantages that he says might follow from it were not instantly destroyed? How could he ensure that history did not repeat itself?

The right hon. Gentleman proffers, in a rather tentative fashion, his so-called national economic assessment, but there is a degree of mystery about what that is meant to imply. The right hon. Member told the Labour Party conference last year a good deal about the national economic assessment. He said:
"It is not an incomes policy under another name … not a way of introducing wage restraint by the back door."
Yet, on his analysis, without such restraint, the downward spiral and the loss of competitiveness would still continue. The truth is that today, as ever, the Labour party offers no credible means of delivering that essential component of his managed exchange rate decline, even if he could manage that, which he could not.

The Opposition also say that they share our desire to get interest rates down. Yet again one must ask what evidence they offer that they would will the means as well as the end. Would they, as the Government have been doing, hold down spending and borrowing? Of course not. Their prescription is precisely opposite. What would be the effect on interest rates if the right hon. Gentleman's "Programme for Recovery", a misnomer if ever there was one, were ever put into practice?

In truth, the effect would be incalculable, and so in a sense it is, but one is entitled to consider the scale of what is prescribed and consider the proposals on offer and unveiled by the Labour party last year.

The Labour party says that it would "need" public ownership in electronics, pharmaceuticals, the construction industry and building materials, private road haulage, major ports and forestry and timber. The cost is clearly immense—£10 billion, £20 billion, £30 billion. Who knows? We have no idea. The Labour party proposes to take
"a majority stake in all existing and future North Sea oil fields".
What would be the cost of that? Perhaps another £10 billion.

The Labour party wishes to nationalise tenanted agricultural land. [Interruption.] Labour hon. Members may not like to hear about the programmes to which they are committed, but the question that the House and the country wish to have answered is what on earth would happen if the Labour party were elected seeking to promote and secure a fall in the exchange rate, and seeking to do that alongside the very policies to which they are committed, and seeking, if the House can believe it, to secure a lower exchange rate, lower inflation and more growth alongside lower interest rates? The truth is that that is quite incompatible with the vast programmes of public expenditure to which the Labour party is already committed.

I do not understand how, consistent with all the natural economic consequences of those proposals, the right hon. Gentleman has the gall to call for and to offer lower interest rates. Perhaps the money would be available from higher taxes, but he would be offering exactly the opposite there again. He wants to lower value added tax, to increase tax thresholds and to do everything that is totally inconsistent with any rational economic prescription for holding interest rates down and stopping borrowing from going through the roof.

What would all these changes do to the borrowing requirement? What would they do to inflation? What would they do to interest rates or the exchange rate? The right hon. Gentleman, as was pointed out, was foolish enough to believe—indeed to pretend—as he presented the programme, that this reckless programme of extravagance would deliver economic growth, rising employment and lower inflation. He sought in that respect to enlist the Treasury model in support of his fantasy, but he has done so only by requiring the model to assume the two things that simply could not be assumed—that he would have success in restraining the growth of incomes on a scale that his party has totally failed to secure so far, and that the implementation of his irresponsible programme would have no adverse effect on confidence. We all know that exactly the contrary would be the case. Nothing could be further from the truth than either of those assumptions. When the right hon. Gentleman takes his plans through the model without those assumptions, what we see revealed by another of his equations is inflation soaring to 18 per cent., a current account deficit of up to £25 billion and a plain insight into the fact that the "Shore factor" is a prescription for economic disaster.

I come to the Opposition's final attempt, reflected in the motion, to square the circle of self-contradiction about prescribing the reimposition of exchange controls, the suggestion that this would in some way save them and sterling from the consequences of the policies that they recommend. Did exchange controls have that effect, or any significant effect, when similar policies, although not quite so bizarre ones, were being followed in 1967 and 1976? Of course they did not.

The House knows, and the Opposition must learn, that the growth in trade flows and markets made exchange controls ineffective long before their abolition in October 1979. There can be no question of their reimposition and Labour Members delude themselves if they believe that reimposing them could save them from the consequences of the policies that they currently put forward.

So it is reasonable to conclude that none of the easy answers offered by the Opposition would deliver the goods—not devaluation, not the national economic assessment, not a spending spree on borrowed money with inevitably higher interest rates, and certainly not exchange controls. The good sense of the British people will see through all that as they have already done. They know that such policies will not work, just as they did not work when prescribed before.

Therefore, the markets need not fear that the policies of fiscal and monetary irresponsibility, which so implausibly masquerade as Labour's programme for recovery, will be put into practice. The British people support the Government and the policies to which we are committed. With or without the support of the right hon. Member for Stepney and Poplar and despite the irresponsibility of his prescriptions and damaging statements, we shall keep the country's economy on the responsible road to sustainable recovery. I invite the House to support the amendment.

5.32 pm

The right hon. Member for Stepney and Poplar (Mr. Shore) complained of the absence, apart from one reference, in the television broadcast of the Prime Minister of any reference to unemployment. However, there was an even more remarkable absentee from both the speeches to which the House has listened this afternoon. It is a factor of the economic scene that is so large and so remarkable that it dwarfs much of the contemporary debate. Perhaps it is so large that on that very account it escapes observation, or perhaps it is found inconvenient to take account of it by those who are following the beaten track of policies of the past. The factor to which I refer is the huge and continuing current account surplus of the United Kingdom.

The right hon. Member for Stepney and Poplar, as many have done many times in the past three or four years, ventured a prediction that this was about to stop. I do not know whether he or I will still be here at the termination of the period that he proposed for his prediction. Maybe the Labour vote in Stepney and Poplar is as secure as the Unionist vote in Down, South. If so, we shall be able to compare notes at the end of the year, should there be an election in the meantime. Perhaps it would be no bad idea if he and I were to agree upon a minor wager by which we could test the reliability of our forecasts. At least that does not excuse us from taking account of the reality with which we are faced now and which has accompanied us through all the vicissitudes of the past three or four years.

In a period in which industrial output is 20 per cent. down on what it was four years ago, in a period in which there have come to be between 3 million and 3·5 million statistically registered as unemployed, the United Kingdom on its trading and current account has continued to make an enormous and persisting surplus. The rate at which this is running currently is between about £6 billion and £7 billion per annum.

This must be a factor of immense significance which we should not ignore. It appears to be a factor which makes nonsense of many proposals which are put forward, and not only from one side of the House. Those on the Government Front Bench and those in the Conservative party generally place continuing stress upon the importance of an improvement in competitiveness, presumably as calculated to render imports less attractive and exports more attractive. The result of that, if and in so far as it is secured, must be a further increase in the huge surplus on our balance of current payments.

The right hon. Member for Stepney and Poplar has told us that he wants to depress the exchange rate of the pound sterling further still. He wants to do this artificially. He does not want to wait for it to happen in case it should happen—he is a Socialist and a planner. The right hon. Gentleman wants to organise it. He did not, however, mention to the House the method by which such a fall in the exchange rate is arranged; but he does know that the way it is done is by manufacturing large quantities of one's own currency and putting them on the market—a point which supports the view of the Chancellor of the Exchequer that measures to reduce the exchange rate artificially are inherently inflationary in their effect. But let that pass. The right hon. Gentleman wants a more competitive rate for the pound sterling. So he wants to boost still further the already large current surplus on the balance of payments account of the United Kingdom.

Then there is strong pressure and frequent argument in favour of curbing the exports of countries which, to use the current expression, penetrate our market, thereby securing what is called a better balance in our trade with them. Japan has been notable in this context. In so far as we succeed in persuading the Japanese not to sell to us what we want to buy at the price at which we want to buy it, and in so far as we succeed in persuading them to buy from us what they do not want to buy from us at the price at which we offer it to them, the effect of that is bound to be—it cannot be otherwise—a further increase in the huge current balance of payments surplus which is so staggering a feature, a feature unprecedented in the memory and experience of a whole generation.

The significance of this factor is quite independent of the composition of the account. People are apt to say, "There is a large entry for oil in the account; so ignore it." The component parts of the surplus do not matter. It is still a huge surplus, and a dominant factor in our economy for a reason which should be close to the concerns of both sides of the House, and especially of the right hon. Member for Stepney and Poplar: its counterpart is an equally huge outflow of capital from the United Kingdom. If we are running a surplus on current account of £6 billion or £7 billion a year, we are exporting £6 billion or £7 billion of capital a year from this country.

I do not believe that it can be argued or demonstrated that it could be beneficial to the United Kingdom deliberately to increase that outflow still further. The right hon. Member for Stepney and Poplar had a horrified reference to make to the tremendous outflow of capital from this country. It may be doubted whether even at its present level there is net benefit in this outflow; but to offer us a prescription of which the purpose is to increase the capital outflow still further cannot possibly make sense.

I caught in the speech of the right hon. Member for Stepney and Poplar a hint of the Labour party line that says, "Ah, yes, but this is all the fault of having no exchange controls. The Chancellor has removed the controls and allowed people to exchange sterling for other currencies if they wish to do so and for whatever purposes they desire." The right hon. Gentleman says, "If and when we get the opportunity, we shall not allow any more of that hanky-panky. We will not allow this blood transfusion of capital from the United Kingdom." I thought I caught an aside to that effect from the right hon. Gentleman—that exchange controls will be used to prevent any massive outflow of capital and ensure that we use it to better effect within our own economy. His trouble is that if one stops the outflow of capital, if one destroys the deficit on capital account, the surplus on current account is automatically destroyed too.

Yes, that must be so. I can differ or agree over many things with the right hon. Gentleman but we cannot disagree that the current account deficit and the capital account surplus are equal and opposite and inseparable concomitants.

I hope the hon. Gentleman will forgive me and spare the House the necessary argumentation but I should be happy to demonstrate that very simple proposition to him later. [Interruption.] I hope that some sections of the House will not tempt me, Mr. Speaker, into prolixity and into starting a seminar that I have not the slightest intention of conducting. Therefore, I will leave as purely a speculative proposition what is a fact of the universe—that, on the balance of payments, the deficit on current account and the surplus on capital account, or vice versa, are complementary and equal.

So if the right hon. Member for Stepney and Poplar intends to use exchange control to extinguish the outflow of capital, he will extinguish that expenditure of industrial and other effort, that quantity of employment, which is represented by the current surplus on our external trade.

I question the factual basis of the right hon. Gentleman's argument. He said that the current account is running at a surplus of £6 billion to £7 billion a year. In 1979, the true figure was minus £1 billion, in 1980, it was £2·9 billion, and in 1981 £6·1 billion. In the first 11 months of the past year the figure was £3·8 billion. Although the right hon. Gentleman dismisses forecasts, the Chancellor estimates the figure to be zero next year.

We shall see about the "zero next year". When I said that the current account surplus is at present running at such a rate, I was taking the quarter up to last November—a quarter in which one would not have supposed that many of the movements, including movements on the exchanges, would be favourable to that factor. However, if he wishes, the hon. Gentleman may modify the figure; but the fact remains that for this country it is a most remarkable and unprecedented phenomenon to find ourselves with a persisting surplus on our current balance of payments. The phenomenon seems to me to invite us to reconsider our entire approach to the problem of unemployment and to the management of the economy.

Disagreeable though the task is, I shall not shrink from showing what I believe this phenomenon portends. It shows that we cannot engineer ourselves out of our present unemployment or our present discontents by an increased and artificial emphasis on those very industries which, in the past, have contributed the mainstay of our international trade. Still less can we engineer ourselves out of it by artificially manipulating such factors in the equation as the exchange rate. We cannot fudge ourselves out of our difficulties.

We must recognise that, consequent on many changes that have taken place in the world, we face a very different economy, perhaps even a very different society, in this country from that which we have previously envisioned. Our efforts and thoughts should be directed in quite different directions from those that occupy them presently.

We should consider, for instance, how a larger element of one of the greatest forms of wealth—leisure—can be introduced into our society without the damaging effect of its being concentrated in the form of involuntary leisure. We should examine our legislation, including our social security legislation, to see whether there is anything in it that is fossilising an obsolete pattern of work and working life.

We should, furthermore, see our economy as destined to be increasingly a service economy in which more and more of us will be occupied in providing services for one another that the rest of the world cannot provide for us. In an ageing population, a population in which the human needs of those disabled by age or any other kind of disability are increasingly understood and analysed, there is an immense reservoir of demand for the application of effort, thought and talent.

It is in such directions as these that we should be looking. But we should not be asking ourselves what the Government should impose. No Government can foresee the new pattern of our economy and society that will once again absorb the energies of our people. It is a pattern that people will have to find for themselves, but they can best do so if they are not hindered either by obsolete legislation or by policies that respond to the difficulties of the past and not of the present or by policies, such as many put forward today, that would increase rather than remove the contradictions of our present position.

In this House and in this country, we are invited to contemplate what may be as large an impending revolution for the people of the United Kingdom as the industrial revolution was 150 years ago.

5.47 pm

I shall be as brief as possible, because I know that many hon. Members wish to speak in the debate. I shall not cover the general ground, because my position is clearly known, especially the emphasis that I put on the undesirable nature of unemployment, which is just as serious as inflation.

In my speech during the debate on the Loyal Address, I asked the Government to say what they believed would change—the general economic movement of this country or that of other countries. In replying to the debate, the Leader of the House said, very openly, that there was no connection between the Government's policies and the expansion of the economy that was required to solve many of our problems. He said it categorically, and I agree. Therefore, it worries me that in the Government's amendment there is still no sign of how they propose to change the economic direction of affairs in Britain.

Of course, the point that the Government emphasised—the reduction in inflation—is to be welcomed. The fact that Government expenditure is under control is also to be welcomed, but that does not necessarily mean that it is at the right level. I was interested to hear the Chancellor's statement that Britain has the smallest proportion of its gross domestic product as a deficit on the budget. However, why should he be especially proud of that?

Britain has a very large public sector—we can argue whether that is desirable or undesirable—and the process of reducing it can be carried on. However, it puts upon the Exchequer the burden of investment for those industries, which the Chancellor will agree has greatly increased under his rule. Therefore, we cannot be expected to be in the same economic position as the United States, which does not have a public sector. That matter must be examined and is an important factor in the reaction of many of those in the world's money markets when they see what is happening to Government expenditure and deficit. I see that the Government Front Bench is already becoming agitated. I hope that Ministers will calm down and consider the matter sensibly, because there is a difference that must be handled carefully.

How can the economy be turned round? The Chancellor said that, at the recent meeting of the Group of Ten, it was agreed that there would be expansion in 1983. In that case, the world's finance Ministers are still kidding themselves in a way that no one else is. Perhaps my right hon. and learned Friend in his reply can tell us about the signs of that expansion in 1983. I congratulate the Chancellor on his appointment as chairman of the interim committee of 20. I welcome it because, as he says, it shows a worldwide vision in the Treasury. If some of his ministerial colleagues in the Treasury do not have worldwide vision, I hope that he will get rid of them as soon as possible.

As to the immediate question about the pound, it is natural that in this debate there has been much politicking and an attempt to blame the Opposition for the change in the sterling rate. I hope that we can abandon that. To attribute to the right hon. Member for Stepney and Poplar (Mr. Shore), who opened the debate with great fluency and skill, and to the Opposition Front Bench or to his party sufficient influence in the world economy to change the level of sterling is disproportionate to their position, as they would be the first to recognise. It also shows a lack of confidence in the survival of the Government through a general election period, which I deprecate. I do not share that lack of confidence.

Those who operate in the money markets are hard-headed. They, the CBI and the Government have been discussing publicly during the past year or 18 months the fact that we are alleged to be 30 per cent. more uncompetitive than the rest of the world. Those people know that perfectly well. They also do not see how, either with ordinary policies or with measures such as those suggested by the right hon. Member for Down, South (Mr. Powell), we can regain 30 per cent. competitiveness in a bearable time unless there is a change in the exchange rate. Therefore, they acted accordingly. They did not act because of the influence of the Opposition, which is well known to be negligible. They acted because they considered the facts and knew that there was no other solution.

The second factor that must be taken into account, which was not allowed for by the right hon. Member for Down, South in his figures that have already been proved to be exaggerated, is the existence of real doubts in the world about the course of oil prices and the impact that that will have on our revenues and on the Treasury. It may be beneficial to us from the point of view of countering inflation still further, but there are real doubts about the matter. That is especially true of the operations of BNOC and the spot market. I understand from those who handle such matters that the next month or two months will be critical.

The third factor that must be taken into account is the Saudi Arabian position, which is that, in the event of world oil prices beginning to fall, Saudi Arabia will be in deficit on its current budget. Of course, Saudi Arabia can call on masses of reserves, but—not only for political but for doctrinaire and religious reasons—it is offensive to the Saudi Arabians not to have a balanced budget. Therefore, they cannot continue their policy of reducing production in order to maintain OPEC prices. If that is the case, we shall be affected both in revenues to the Treasury and in our balance of payments.

A political factor is that the present poor relations between Britain and Saudi Arabia are bound to affect the latter's choice of country to deposit its surpluses. We cannot have it both ways. We cannot try to divorce our economic policy from our foreign policy and we cannot expect to escape the consequences of foreign policy in our economic position. That fact has become more and more plain in more and more parts of the world, and I ask the Government to consider the matter most carefully.

Those are all factors in the depreciation of sterling. However, we return to the basic point that I hope the Government can answer—what do they consider to be a satisfactory position for sterling today in regard to our competitiveness and to the position of our colleagues in the Community and in the United States of America? The Government have greatly changed their policies during the past two years. They have changed their policies on interest rates and on intervention in the currency markets. Yet they still continue to deny that they are using, or are prepared to use, those weapons. That makes it extremely difficult for the rest of the world to judge how to react to British monetary policy, towards the pound and towards Government policy as a whole.

I suggest to the Chancellor that we would have a much sounder basis for operation if the Government said frankly that they are prepared to use all those weapons and—which is well known—that they are using them now. They must also say that the pure monetarism with which they started is no longer the doctrine to which they adhere. We all know it. Why cannot they say so frankly and have a much more sound basis for their operations?

The international factor has become extraordinarily critical. Perhaps I may be forgiven for saying that, even two years ago in a speech in the House, I forecast what would happen to many of the developing countries unless effective action was taken. It has happened disastrously in Poland, Mexico, Brazil, Argentina and Nigeria and in many smaller countries. We all know of other countries on the list. The scale is enormous and is much greater than we recognised when we gave the warning. There has been no co-ordinated action to handle the matter. It is perhaps more astonishing to learn that the major banks have never had any means of knowing how much each of them was putting into the developing countries or what the total commitments of all the banks would be. The result is that the weakness of the developing countries has proved to be their strength up to this point. We could not possibly face the total collapse of the Western banking system and therefore Governments and international institutions have had to act.

The most recalcitrant of all, the Washington Administration, maintained complete opposition to any help for developing countries until Mexico collapsed. As that country was on its border, it could not ignore it. Therefore, at 8 o'clock in the evening, in a rush operation, sufficient money was brought together to save Mexico from having to announce its total bankruptcy.

These matters have not been solved permanently, as some like to think. They have only been dealt with for a year or 18 months. Year after year, the international organisations, the commercial banks and Governments will have to work out solutions for these countries to maintain their solvency. That is certainly the case as long as world depression lasts.

I have a point about the expectation of the finance Ministers that things will be better in 1983. The best calculations that one has been able to obtain show that the developing countries themselves accumulated a deficit of $95 billion in the past 18 months or two years in running down their reserves. Many are bankrupt, and the others now do not have reserves with which to buy either commodities or manufactured goods. As the demand from the developed world has fallen so far, the developing world is receiving lower and lower prices for the great majority of its commodities. This is continuing.

Therefore, where is growth to come from in 1983? The growth can only start if this deficit is being made up and if the developing world is given the wherewithal to start purchasing from the developed world, our own industrial world. That is why I welcome the decision announced by the Chancellor, that the general agreement on borrowing was increased from 6·4 billion SDR to 17 billion SDR by the meeting yesterday. That is welcome and I congratulate my right hon. and learned Friend most wholeheartedly on achieving it.

However, the gap between that and the deficiency of the developing world today is still great, and must be about $65 billion. Where will that come from in 1983? This is the task to which I suggest that the Chancellor will have to devote a great deal of his attention as chairman of the 20. If one looks at the possibilities, the movement for increasing the quotas of countries to the International Monetary Fund has at last gathered momentum, but that cannot become effective before 1984.

The arguments about the percentage by which the quotas will be increased is continuing. Some think it should be 40 per cent., some 60 per cent. and France thinks 100 per cent. No doubt there will be a compromise, which will contribute, but not until 1984. Where will the rest of the money come from in 1983?

A further source could be rapid action on special drawing rights. This could contribute considerably to what is required in the developing world, and particularly if the developed countries were prepared to forgo their right to drawing rights and enable them to be used, under the control of the IMF, by the developing countries. That is a proposition that should be considered. Provided that the control is there, it can be effective.

The British played a large part in the creation of the SDRs. A general criticism of them is that they are inflationary. At a time of deep depression, with deficiencies in liquidity, it cannot be inflationary if, under control, one uses SDRs to enable the developing world to maintain its solvency and its demand on the developed world for the materials that we produce. Therefore, I ask the Chancellor to look at this problem from this point of view.

My right hon. Friend may be grateful to know that the decision to hold the IMF interim committee in February rather than in April has been taken by me specifically to accelerate, if we can, the date of agreement on the enlargement of IMF quotas. At our meeting yesterday, the finance Ministers of the Ten agreed that it would be desirable, if possible, to implement that agreement by the end of 1983. The item of special drawing rights is something else that will have a place on our agenda.

I welcome this, and I am glad that the Chancellor brought the meeting forward, and that this has been agreed, although not published. The Chancellor says that it will be effective at the end of 1983, which does not alter my point that it cannot have any effect until 1984. Therefore, we are still faced, for the whole of this year, with a grave deficit of which only part, so far, has been mustered. That is why I am also glad to hear from the Chancellor that the SDRs are no longer taboo but can and will be considered, because they can play an important part.

In his press conference before he left the United States for the Frankfurt meeting, Mr. Donald Regan, the Secretary of the Treasury in the United States, made some very important remarks, one of which was a revelation. He said that there had been no talks so far, and no coordination about the continued bankruptcy of the developing world and the impact on the Western banking system. It is deplorable that, throughout this period, there have been no talks on an international level, but that is not the point that I wish to emphasise. I emphasise that Mr. Regan gave it as his view that the international organisations must now be reformed in order to cope with the world economy. He said that clearly and firmly, and I agree entirely with him.

The IMF is carrying out part of that reform in that it has, for the first time, taken the lead in arranging packages as it did over Mexico, as it is doing over Brazil, and as it is trying to do for Nigeria and one or two other countries. What Mr. Regan says is true. After 30 years, the IMF and the World Bank need to be reconsidered and reformed from a positive point of view to enable them to do more. Moreover, the world financial system needs to be reorganised in a way that will enable us to have stability such as we had for 25 or 30 years.

That stability has not been mentioned much today. The leader of the SDP may mention it if he catches your eye, Mr. Speaker, because he was responsible for so much of it. However, to help achieve that stability again, it is important for Britain to come into the European monetary system. It is important for us because it gives us a much broader base from which to face speculation on sterling, if it goes above what the Government want, without forcing higher and higher interest rates, which prevent national recovery.

I do not wish to go into all the arguments about this and about what is involved in closer alignment of economic policies and so on, but this is desirable. I am prepared to face closer alignment because the basis of our prosperity for 30 years was consultation and co-ordination of the economic policies of the West. That is what we need to have now. We are suffering from those who think that they can run their own affairs regardless of anybody else.

The right hon. Gentleman is coming to a point on which there may be an important but legitimate difference of opinion. When a Government attempt to run their internal economy, they may not have control, but they have some option and choice, within limits. Is the right hon. Gentleman therefore content that in joining the EMS those options and that freedom of action would be constrained by virtue of joining that system and its system of political control through banking? The right hon. Gentleman must agree that that control would not exist if the Government concerned were not a member of that system.

As the hon. Gentleman says, there is room for a difference of opinion. I differ from him because I believe that the options of the British Government are more and more limited. That is becoming clear. The EMS gives us a broader base on which to operate. It is now also apparent from two years' experience that the EMS is stable and more flexible than the Bretton Woods system ever was. Therefore, it is an advantage to us to be in a stable and flexible system. If we are to have world stability, we must face the fact that we must have an operation in which, in addition to a European area, we can have a dollar area and a yen area until we can come together under the IMF.

It is not always realised that one of the major changes recently has been that the European Community has a GDP that is equal to that of the United States and, secondly, that the part that non-dollar currencies play today in world financial matters is equal to that of the dollar. That puts on Europe with the EMS, and Japan with the yen, an equal responsibility with the American authorities, with the dollar, for establishing world stability. That must be brought home to those responsible. I hope that the Chancellor of the Exchequer will do so.

When the Secretary of the Treasury in the United States made his statement, we should have seized the ball and run with it in the same way as Ernest Bevin as Foreign Secretary did with General Marshall's single sentence that the Americans would finance the recovery of Europe. Donald Regan's statement is equally important. He is supported by Mr. Shultz, the Secretary of State, a man of immense experience and great wisdom who understands the international situation as well as anyone in the United States today.

My judgment is that if the Secretary of the Treasury and the Secretary of State together are prepared to work for the reform of the international institutions and the international monetary system, they will succeed. I hope to see the British Chancellor of the Exchequer taking the lead with as many of his European colleagues as are prepared to do so in pursuing that matter and saying "We agree. After 30 years a reform of those institutions is required for positive reasons—not to block their activities. We need to create an international financial situation that will allow the expansion of the world economy once again and therefore the recovery of our country." That is the message that I hope the Chancellor will convey. The quicker he does so, the better.

6.12 pm

It may not surprise the House when I say that I agree with a number of the points that were made by the right hon. Member for Sidcup (Mr. Heath). I agree that the Government's excuse that the right hon. Member for Stepney and Poplar (Mr. Shore) was responsible for the slide in the value of the pound is nonsense. There was a much more fundamental change of sentiment. At any rate, the downward movement began before the right hon. Gentleman issued his policy statement in November. As a matter of fact, he was foolish, from his point of view, to announce a 30 per cent. devaluation as his goal. The idea that one can say that and follow a controlled glide path of descent is an extraordinary illusion. If the right hon. Gentleman were in control, he would have a tail spin and would not follow a glide path. None the less, I do not for one moment believe that he is responsible for what has happened in the past week or so.

The right hon. Gentleman made a more powerfully argued case, though it was stronger on criticism than in dealing with the problems involved in his own policy, than the Chancellor of the Exchequer. After listening carefully to the Chancellor, I found it almost impossible to discover what was the Government's attitude to the exchange rate, past changes, the present level and future changes. The only thing that seemed to emerge with any approach to clarity was the implausible proposition that when under him an exchange rate fell in an unplanned way it did not have inflationary consequences, whereas if it fell under anyone else it had disastrous inflationary consequences. Apart from that, no clear point about the exchange rate emerged.

I shall go a little wider and see how from our present position we can achieve greater stability and some prospect for world growth. I, too, congratulate the Chancellor of the Exchequer on being elected chairman of the interim committee of the Group of Twenty. I am sure that that is an honour, although it is not necessarily an endorsement of all the Government's present policies. Looking at those who occupy international chairs—including myself in the past—one realises that it does not automatically amount to an endorsement of the policies pursued by the Government of the home country. I hope that the right hon. and learned Gentleman will use the opportunity to do something constructive.

Let us be in no doubt that the world is spiralling down into the deepest slump for 50 years and that, on present policies, as broadly pursued around the world, the chances are that it will get worse not better. It is no good the Government taking comfort from how badly other countries are doing. As a matter of fact, the big countries are not doing as badly as we are. They are all doing badly. The idea that there is comfort in that is the most narrow-minded, short-sighted and, as we said in our amendment, nationalist outlook. From the point of view of making debating points, the point is that the worse they do, the worse is the prospect for us and for the whole world.

Deflation and protectionism are breathing upon each other and can turn the situation from being not merely highly undesirable, but deeply menacing to such an extent that within a few years, unless we are able to do something about it, we shall see the great gains of 1948 to 1973 being thrown away. What can be done at present?

Before the right hon. Gentleman advances his proposals and suggestions, will he help the House by telling us, so that we know exactly what weight to put on his words, whether, at the convention of the alliance on Thursday, he will be adopted as undisputed leader of the alliance?

That is the last time that I shall give way to the hon. Gentleman.

What is the Government's present position? They almost always look inward. That is true of other Governments, too. Each country tries to find its own solution. Occasionally it tries to lecture other countries into more restrictive postures at home, particularly those with heavy debts. Nothing can be worse for the whole world than a collapse and further restriction of world markets. On the contrary, this is the moment when it would be both highly desirable and possible for the major trading nations of the world to proclaim a change of course.

The basic cause of the trouble, to some extent since 1973, and more so since 1979, has been two oil crises. There were massive increases in oil prices followed by restrictive monetary policies by Governments to try to contain the inflationary consequences. That has been made substantially worse by wildly fluctuating exchanges.

It is not true, as the Prime Minister is fond of telling us, that exchange markets reflect reality. How could that be so when for the past two years Japanese exports have been flooding the world, yet the yen has been depressed far below its real value until recently? That is not the true position. To a substantial extent, far from trade patterns setting exchange rates, exchange rates have set trade patterns. This has been very damaging. It has certainly damaged the prospects for world trade.

On top of that, there has been the over-extended position of many private banks lending, in itself desirable, to countries that can now hardly meet their debt charges from their total exports.

Conditions are changing. A real window of opportunity is now open, but it may not remain open for very long.

We shall not see a repetition of the oil crisis. It is more likely that there will be a decline, not an increase, in oil prices. In most places around the world, interest rates have temporarily been coming down. There is mounting concern, to a greater extent elsewhere than in this country, about unemployment. There is deep concern in Germany, and there is a growing appreciation in the United States, even in influential sections of the Administration, that it is not desirable to have anti-inflationery policies, whatever the consequences in other areas.—[HON. MEMBERS: "What about employment in Glasgow?"] We should seize the moment for co-ordinated action to try to reverse this decline.

Action is required along three lines. There must be joint expansion among the leading trading nations. A country on its own can do a certain amount—and much more should be done in this country than is being undertaken at the present time—but it is much better and safer if countries can expand together. Otherwise there is the risk of a balance of payments problem with exchange rate and inflationary consequences. Now is the moment at which this could be done. Such an exercise was attempted at the Bonn economic summit in 1978. It was agreed, following some expansionary moves by the United States and the United Kingdom, that Japan would expand by 1·5 per cent. and Germany by 1 per cent. Canada, France and Italy agreed to make moves of their own.

The conventional wisdom is that that exercise was misconceived because it proved abortive for one isolatable reason that is highly unlikely to be repeated—the oil price increase that came six months later. Whatever else happens, that will not be repeated. That lion will not be in the path again. The basic rationale of Bonn was sensible and should be revived. There would be much support throughout the world if that happened. Relatively small concerted changes in the fiscal stances of different countries would make a substantial difference to the GDP of all of them collectively and to levels of unemployment.

The right hon. Gentleman said that the concerted expansion of 1978, following the Bonn summit, was aborted by the single extraneous circumstance of the second oil shock. Was not the earlier period of concerted expansion aborted by the first oil shock? What leads the right hon. Gentleman to think that, there having been two attempts at concerted expansion, each of which was aborted by an oil shock, there would not be a comparable experience on the third occasion?

I think that most people would agree with me, not with the hon. Gentleman, that it is the state of the world oil market. I am unaware of anybody who thinks that the world oil market is likely to produce major oil price increases in the near future. On the contrary, I believe that prices are likely to come down. I do not believe that this prognosis would be changed by a limited but significant increase in the growth rate of the major countries. I am amazed that such a question should be put from the Treasury Bench.

A much closer approach to monetary stability is also required. I am certain that the wildly fluctuating exchange rates are not representative of reality. They have been the enemies of world trade and international investment to a substantial extent. Consider what has happened to the sterling-dollar exchange rate. In the last four or five years it has gone up from $1·58 to $2·40 and down again to $1·58. That did not represent a real change in competitiveness or trading positions.

Will the right hon. Gentleman examine the example of Norway? Although being a large oil producer, it has managed to keep inflation under control and has unemployment of 3·4 per cent. compared with unemployment approaching 16 per cent. in Scotland.

Norway has not coped well with inflation, but it has done very well on unemployment. The measures that I am advocating will help to reduce unemployment in Scotland, as they would elsewhere in the United Kingdom. I have much contact with Scottish opinion as I represent a Scottish constituency. I do not believe that Scotland thinks that its problems can be solved by not looking overseas.

What can sensibly be done about international monetary stability? It is not possible to put the past on its throne again and to recreate Bretton Woods. There is no point in being Utopian. Bretton Woods served the world extraordinarily well for 27 years. At the end of that period, even the power of the United States economy was not sufficient to sustain the solar system that was the essence of Bretton Woods and which it had discharged splendidly over a long period. The system cracked. It is not possible to revert to the same form.

There are variations in the performance and inflation levels of different countries. What can be done? There is now mounting disillusion with freely floating currencies. Few people think that such a system adequately serves the world. We have undoubtedly suffered from too high an exchange rate, as has the dollar more recently. That situation has helped to destroy competitiveness in the United Kingdom. It has exaggerated de-industrialisation. In the United States it has fanned the embers of protectionism that had been relatively dead for a long time. Markets alone cannot do the job.

What can we do short of proclaiming fixed exchange rates, which would not necessarily stick in present circumstances? We can, and should, attempt to create a tripod between the dollar, the yen and the European monetary system. That would be of great advantage to this country, whatever one's views about Europeanism or anti-Europeanism.

It has nothing to do with protectionism. Had we been in the Community earlier, we would have substantially greater currency stability than we have.

The hon. Member for Newham, South (Mr. Spearing) made an interesting intervention in which he said "But we have freedom to do what we like".

I think the hon. Gentleman actually said that we had limited options to do what we like outside but not inside.

In the early days of the EMS, I remember having conversations with two successive Prime Ministers, both of whom assured me that in principle they very much wanted to join the EMS. However, one said, "I am afraid of being locked in at too high a rate, which would inhibit our ability to deal with unemployment." The other said, "I am afraid of being locked in at too low a rate, which would inhibit our ability to deal with inflation." As a result, we did not join. Since then we have had higher unemployment and inflation than almost any country that belongs to the EMS. It is easy to find excuses for not doing things, but we may get a great deal more stability if we are in the EMS.

The tripod that I have suggested should operate on the basis that Governments in charge of the major currencies should endeavour to keep within target zones. The 6 per cent. margins that the lira has within the European monetary system are better in present circumstances than the narrower Bretton Woods margins. Monetary policy should be used to keep within those margins in response to short term ways. I do not believe that any such system that is constructive can resist the long term swell of the ocean, nor do I think that it should try to do so. However, it can iron out many damaging short term fluctuations that in no way represent reality. On that basis, we would have a system that offered a real possibility of achieving greater stability. Buttressing a concerted move to achieve some expansion in the world economy could give us a better chance than we have had for a long time.

If we are to achieve the ripple effect of this expansion from the major trading nations, there must be a greater flow of finance to the developing world. I agree broadly with what has been said on this issue, and I shall not develop my argument at any length. I am glad about what has been done in the IMF, but I believe that there should be a further issue of special drawing rights angled towards the poorer countries. There must also be a development of co-financing schemes between the private banks and the international institutions. There must also be some help with excessive interest payments. Otherwise, there is a great danger that the world banking system could collapse. It is possible to exaggerate that, but it is perhaps even easier to ignore it. At present, it remains a real danger.

To take such an attitude to finance to the Third world is not soft hearted generosity on the part of the industrialised countries. It is enlightened self-interest of exactly the sort that enabled us to get out of the post-war position, such as when the Marshall plan picked Europe up off its back. Not only did that give Europe the greatest period of increased prosperity almost in recorded history, but it gave the United States the greatest increase in prosperity in the history of the world. It also led to the most freely accepted period of American leadership.

That cannot be recreated. The balance has changed. The leadership must now come from both sides of the Atlantic. It is crucial that the European Community and the United States do not allow their trade differences, which are real but containable, to impair the vital political partnership that is now needed.

Those are ways in which we could take real steps forward. The first two proposals would ensure concerted expansion and greater currency stability, and the third would ensure that markets are not blocked by penury.

We have done too well out of interdependence in the past to turn our back on it now in the harsher and more difficult circumstances of today.

No, I am just about to finish.

I am sure that those measures are almost the only route by which we can hope to recreate jobs, to give the world the prospect of growth and allow it to escape from the threatening dungeon of protectionism and deflation, which breed one on the other and pose the greatest threat that we are now facing.

6.36 pm

It is a great honour for me so quickly to follow, after the Front Bench speakers, three experienced parliamentarians. It was a pleasure to listen to what they said. I particularly agree with what was said by my right hon. Friend the Member for Sidcup (Mr. Heath) and the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), not only about the Third world but about their belief that we should have been in the EMS from the beginning.

However, what the right hon. Member for Down, South (Mr. Powell) said was possibly more important, and I should like to remark on it in my short speech. I may not have the right hon. Gentleman's gift of oratory, but I agree entirely with what he said about the need for radical change.

I intend to turn away from the world scene that has been portrayed by these three world statesmen and to concentrate instead on the British economy. The debate has been called for by the Opposition to discuss what they term the economic crisis, so it might be a good idea first to find out whether there is a current economic crisis.

We can use various indicators to measure such a situation—the rate of inflation, consumer spending, interest rates, the level of the stock market, the external value of our currency and the employment position. If those indicators are taken one by one, it will be seen that the Government have an excellent record. The rate of inflation is substantially down and is now running at about only 6 per cent. On consumer spending, we have just been told that the December figures in the High Street, and even now into the January sales, are the highest ever recorded. There is not much sign of an economic crisis there. Interest rates have come down considerably over the last 18 months—another pointer away from the economic crisis—and in the last year the stock market has come up quite a way and is now at a healthy level. I shall mention the exchange rate of the pound shortly.

With the exception of the other indicator of employment, I suggest that to some extent the economic crisis is a figment of hopeful Opposition imagination.

Last year, the Council of Europe had a full debate on this worldwide problem, and experts from every country agreed that even with unemployment in the OECD countries now running at about 32 million, it could rise to above 35 million by the mid-1980s. This is where I very much agree with the right hon. Member for Down, South.

We in the advanced world shall have to look at this problem in a completely different light, because, provided we do not all blow ourselves up there will have to be radical changes in this area.

It is no good continuing to make steel that no one wants, to build ships that no one will sail or even to dig out coal that no one can use. The jobs will come in new industries, such as electronics, and in greater measure in the service industries and activities such as tourism. If we are able to make the wherewithal to preserve our standard of living with fewer working people, leisure must cease to be a dirty word. It must be properly planned and taken advantage of.

If the hon. Gentleman believes so strongly in leisure, why, on Monday evening, did he vote for a rate support grant in Scotland that demanded a cut of 33·3 per cent. by local authorities in leisure and recreation areas?

The hon. Gentleman cannot raise his sights to the areas and vistas that I am trying to explain. We shall have to look at schemes for early retirement, different employment patterns of work-sharing and shift work, and all the other areas of human endeavour that were outlined by the right hon. Member for Down, South.

I was amazed when the Shadow Chancellor of the Exchequer said that an incoming Labour Government would reduce unemployment in a parliamentary term from 3 million to 1 million. Since the end of the second world war, 38 years ago, there have been 11 British Administrations, of which six were Labour and five Conservative. Every time a Labour Administration demitted office, unemployment was higher than when they came in. This fact should never be forgotten. Who believes that a future Labour Administration will change that typical Socialist pattern? That also happened to some extent under Tory Administrations because unemployment has been increasing steadily since the end of the second world war. On a couple of occasions, the Tory party was fortunate enough, or some people might say clever enough, not to have higher unemployment at the end of its period of government than at the beginning.

I hesitate to comment upon the Shadow Chancellor's statement that he would devalue the pound by 30 per cent. and what that would do to the economy. Most people have discounted the chance of a Labour Administration in the foreseeable future, or we would have a real economic crisis on our hands.

The current level of the pound is about right for our business and exporting community. Who is to say that that level will be right in 12 months time? It has reached its present level during the past six months, but it is still 20 per cent. above the level at which the Shadow Chancellor threatens to devalue it, with all the dire consequences that that would have.

Apart from the serious problem of unemployment in the developed countries, the economy of this country is in better shape than it has been for years, thanks to the Government. I trust that there will be no change in the path that the Government are pursuing.

6.42 pm

The right hon. Member for Down, South (Mr. Powell) made, as always, an interesting contribution. However, on this occasion I believe that what he said about the speech of my right hon. Friend the Member for Stepney and Poplar (Mr. Shore) was highly misplaced. Since that is central to the Labour party's alternative programme, I want to say something about it. The right hon. Member for Down, South made the point that there is a large current account surplus at present. That is true. He acknowledged also that it is mainly on the oil account. It is a key fact, and one of which in his strictures he did not take account, that the non-oil trade account has been deteriorating fast for some time, is continuing to deteriorate, and on the Treasury forecasts is expected to deteriorate further over the next year. By the end of the year, even net of the surplus on oil, there is expected to be no surplus on the trade account as a whole. That is serious.

The alternative proposed by the right hon. Member for Down, South is that we should rely on a service-oriented economy. Although I do not believe that anyone would wish to deny that the service industries can continue to make an important and growing contribution to our balance of payments, there is no way in which it is possible for the service sector to take advantage of the wide and growing deficit on the trade account that would arise if there were any recovery of manufacturing industry. The right hon. Gentleman should take account of the Labour party's proposals for a further depreciation in the value of the pound although, as my right hon. Friend the Member for Stepney and Poplar said, there is no commitment to the 30 per cent. figure, which is purely an illustrative simulation. However, there is no doubt that we lean in that direction. The Chief Secretary to the Treasury may laugh, but if there has been a worsening in relative unit labour costs since 1975 of about 15 per cent. to 20 per cent., does he or the right hon. Member for Down, South seriously believe that we can grasp back that degree of uncompetitiveness solely by improvements in productivity relative to our competitors, or by improvements in lower relative labour costs? That is the central issue, and it is for that reason that the Opposition believe that it is crucial for some easing of that to take place through a further depreciation of the parity rate.

In what jobs are people to be employed under Labour? What jobs does he envisage appearing to take up our present dreadful unemployment deficit?

I suggest that the hon. Gentleman reads the "Programme for Recovery" published by the Labour party, in which that issue is extensively discussed. If there were an expansion in the economy, despite the improvement in microtechnology that we have seen, there would be ample room for an expansion in the number of jobs in all the traditional sectors where at present we have contracted out of all proportion to what is justified. If the hon. Gentleman doubts that, I suggest that he looks at Japan and California, which have the best records in microtechnology and employment.

After four years' experience of an economic policy that has been pursued relentlessly by the Government, the speculation against the pound within the past week or two and whether the Government have or have not mismanaged the exchange rate are not the fundamental issues. The more important central issue to be considered is whether current economic policies can achieve a sustainable economic recovery, not whether they have—it is patently obvious that they have not—but whether they can. That is why I believe this episode is such an important sign for the future.

It is true that the recent fall in the pound is an overdue adjustment to the gross overvaluation of the pound that occurred in 1980 and 1981, as was made clear by the governor of the Bundesbank in his evidence to the Treasury and Civil Service Committee. If that straightforward view is taken, the pound should fall further, for the reason that I have already given. Even after a 12 per cent. depreciation of sterling since November, relative unit labour costs have still deteriorated substantially by about 15 per cent. to 20 per cent. since 1975. No realistic improvement in labour costs or increased productivity can possibly bridge such a gap without some further depreciation of the effective exchange rate.

I believe that the markets are saying something much more fundamental than that. They are not simply making an overdue adjustment regarding the past; they are expressing their lack of confidence in the future, not just as to whether current policies are working—it is clear that they are not—but whether they can work. I believe it is with good reason that they form that view. Again, of course there are proximate reasons for a run on the pound, such as falling oil prices, which reduce the pound's attractiveness as a petro-currency. We are all familiar with that.

But there are deeper and more significant calculations determining market sentiment at this time. These are, I think, crucially, that after four years' rigid adherence to strict monetarist-based policies and the biggest collapse of manufacturing that we have seen in 50 years, there are still no signs whatever of any economic recovery. Secondly, not only is unemployment not coming down; inflation is now irrevocably moving upwards. The one jewel in the Prime Minister's crown is now beginning to look distinctly jaded. Thirdly, Treasury forecasts that the balance of payments would do no better over the whole of 1983 than simply break even certainly imply that by the end of the year trade will be substantially in deficit. A Britain that cannot pay its way even when demand is so utterly depressed as it is today is surely a distinctly poor prospect. That is the message that the markets are giving to the people of this country.

I do not think that anyone can say that this classic slump in international confidence is wholly unjustified. On the first point, the Government have never been able to say where a sustained recovery of demand is likely to come from. The latest alibi in the Industry Act forecasts places it in terms of a gradual increase in exports, plus an increase in stock-building. Those are the two factors that are stated in the Government's report. But the former certainly will not be achieved unless there is an improvement in world trade—and there is no sign of that—and the latter is unlikely since manufacturing stocks remain historically high in relation to manufacturing output, even today.

On the key question of inflation, I do not think that it will have escaped the notice of the market that if monetarist doctrine has any validity at all inflation is bound to rise. Two years ago the money stock MTFS target of 6 to 10 per cent. was exceeded by an outturn of 13 per cent. Last year the target was 5 to 9 per cent. and it was exceeded by an outturn of 11·5 per cent. Where the Chancellor gets his ideas of sound money policies from I simply cannot understand.

What this shows, of course, is that it is not the Government's monetary restrictiveness that has brought clown inflation but the fact that Government policies have engineered a classic slump which, as a result, has cut back inflation. That is what has happened. If that is the case, I think that the Government have never managed to give a convincing answer to the rather crucial question of how, if a recovery were to occur, the inflationary spiral is to be prevented from starting all over again.

What was supposed to happen, according to the Government, was that inflation would be squeezed out of the system once and for all before the expansionary surge began again. But there is not a shred of evidence of that. With unemployment at 3·25 million today and still rising, the wholesale and raw material price index is now rising at a rate of 7·5 per cent. a year, and where that index goes the retail price index will follow.

What was also supposed to happen under a monetarist regime, if there ever was any validity in it, was that inflationary expectations would be irretrievably broken, so that in any future expansion the loss of volume at the expense of inflation—what the Government have always said has been the problem in the past—would be irreversibly improved. Yet what do we see? Again, the Industry Act forecast—this is the Government's own statement as to their expectations for the future—is that manufacturing output will recover by only 0·5 per cent. in volume over this next year, while Income Data Services reports at present are showing wage settlements at 7 per cent. and probably rising.

It is this growing erosion of confidence, not only that the Government's policies are not working—I do not think that we need any proof of that—but that they cannot produce a sustained economic recovery, which lies at the heart of last week's debacle. I think that it is this growing realisation that is causing more and more people in this country to look to the alternative, which is the alternative that the Labour party has put forward.

It is fundamentally untrue—I would say that this is the single biggest fallacy in the Government's case—that any expansion of demand by the Government is bound to be unreasonably inflationary. That is what the Government have repeatedly said and it is totally untrue. Simulations that have been done on the Treasury model show that a gradual increase—not a sharp increase but a gradual increase—in public expenditure, a modest further depreciation of the pound and a modest rising tariff on finished manufactures, linked with a significant annual cut in VAT, a similar annual cut in national insurance contributions and the national insurance surcharge and cuts in interest rates, as a combined package—that is important, because they are interlinked—can produce a cut in unemployment. I will not say whether it will be precisely 2 million but it will be a long way in that direction over a five-year period, without inflation at any time during that span of time exceeding 12 per cent., and, indeed, falling by the end of that period to about 7 per cent., which is actually below what is now forecast to be the result of continuing the present policy of persisting with deflation.

That, I believe, is the kind of programme that is desperately needed if we are to get Britain moving again. It will require a new Government. It is because more and more people are coming to the view that the evil of mass unemployment will never come down under the policies that are being pursued that I believe that, Falklands or no Falklands, the Government's days are numbered and that change cannot come too soon.

6.56 pm

My right hon. Friend the Member for Sidcup (Mr. Heath) did the House a great service in broadening the discussion as he did. He was right to remind us that we must take a world view. I thought that he made a superb speech. I was glad that it was so closely followed by the right hon. Member for Glasgow, Hillhead (Mr. Jenkins). I wish to make the same point, but perhaps I can put it in a slightly different way.

In February of last year the Select Committee on the Treasury and Civil Service, as the hon. Members for Oldham (Mr. Meacher), for Motherwell and Wishaw (Dr. Bray) and for Colne Valley (Mr. Wainwright), all of whom are most hard-working and able members of the Committee, know well, began an inquiry into international financing arrangements, Since then we have experienced the sovereign lending crisis and a clear misalignment and volatility of exchange rates not only affecting the pound, about which we are chiefly talking today, but, as has been remarked, the over-valued dollar and the under-valued yen. These matters have made and will continue to make headlines. They have caused worry and confusion, and they are really the main reason for today's debate.

We have taken evidence, written and oral, from academics, business men and central bankers. I would like to say on behalf of the Committee how helpful my right hon. and learned Friend the Chancellor and officials at the Treasury and the Bank of England have been to us in that regard.

On 2 January the Committee visited the United States for a week of discussions. I cannot anticipate the Committee's report. Our work is not finished. I hope that it will be available in the spring. I merely remark that I hope that our Government and the other Governments of the free world are as near conclusions in regard to these matters as, I believe, the Committee is. What is so worrying is that they seem to be given so little thought at present.

Meanwhile, I give my own views. I believe, as my right hon. Friend the Member for Sidcup said, that the world stands on the verge of an economic crisis. The evidence is all around us. Indeed, it shrieks for attention—the obvious recession, the slow-down in world trade, widespread, and rising, unemployment of 32 million in the OECD countries and more than 3 million in this country. This must stop.

There is potential disaster facing the less developed countries, to which reference has also been made this afternoon. There are the problems of debt with huge risks for the banking system and now, inevitably, the pressure for protectionist policies. In this scene our country is vitally affected because of Britain's dependence on world trade and the obvious impact that any interruption to its steady growth must have on our prospects for employment and prosperity.

As the right hon. Member for Down, South (Mr. Powell) said in another context, we are in a new situation that is not fully realised and understood. In any case, in the context of capital mobility internationally, plus the vulnerability of our domestic economy to economic developments in other countries, because of the scale of our overseas trade relative to gross national products, we are less able by our domestic policies to affect our own economic destiny.

What happens in the world is particularly Britain's concern. The world has a clear choice. We can continue what I believe to be the slide into disaster or we can attempt to lay the foundations for orderly growth. I had hoped that was going to come out of the Versailles summit. It is tragic that the words written in the communiqué apparently meant nothing. My desperate anxiety is that we should make the right decisions and that the United Kingdom should lead in the context that the United States has not yet fully come to terms with the dual role of the dollar on the one hand as the United States domestic currency and, more important by far, on the other as the world's currency of today. I warmly welcome the statement of Dr. Beryl Sprinkel, with whom we had conversations in Washington, that positive steps to this end should be taken forthwith.

The causes of the world recession are not hard to define. In my view, for what that is worth, remedies for them are to hand. They must be taken. To go through them, it is clear that the two oil price shocks, now happily mitigating to some extent, were accommodated by too much borrowing. That delayed a necessary but inescapable adjustment. There has been a huge growth in non-official international capital markets. For example, many hundreds of billions of United States dollars float outside the United States uninvested in the sense that they are not producing goods and services. Thus, there are several United States dollars in various forms outside the United States for every dollar inside.

One must give credit to the commercial banks for the effort they have made in the recycling of petrodollars and other currencies. Yet, in practice, they have run horrendous risks. To take some statistics shortly, about $300 billion are owed by Latin America. The largest nine United States banks have lent 50 per cent. of their capital and reserves to Mexico alone. To get that matter into scale, the total capital of all the 15,000 United States banks is approximately $40 billion. Over 1,500 banks are now being invited, or cajoled, to assist Mexico in debt rescheduling.

Then there are the problems in Africa, in the Communist bloc, and so on. Without going into those in detail, I would just point out that the potential consequences for the banking system and for public confidence in it if something goes wrong, as it still may, are horrific to contemplate. Thanks, however, to the concerted, if belated, action by the world's bankers, disaster has been narrowly averted. Let us make no mistake. This is a crisis, the worst effects of which have only just been kept at bay.

The world is a dangerous place. The collapse of a number of United States banks has been averted, but it has been a close call and the danger may recur. Potential political chaos in any one of the defaulting countries is still a possibility. Anyway, in consequence, the prospects for a recovery in the world economy are deferred somewhat and could easily worsen.

In spite of what is said and written, there is happily no sterling crisis. There never was, and there never need be, since, on any rational assessment, Britain's economy is strong and in not too bad shape. There may be features that one dislikes—certainly there are features that I dislike—but the balance of payments is strong. Britain's banks are by no means as heavily involved in doubtful overseas loans as are the banks of America. Whatever may have been said by later speakers, the chatter that we had from Labour's Front Bench about devaluation has not helped the situation.

Leaving that and coming back to my main theme, there are two glaring weaknesses in the world banking scene. Both were referred to by my right hon. Friend the Member for Sidcup. The first has been lack of information between bankers about the affairs of the countries to which they lend. I regard that as inexcusable and I hope that the technical committee now established by the bankers will finally put that to rights. The second is the absence of coordinating mechanisms to restrict borrowing to tolerable levels. This is the responsibility of finance Ministers. When my right hon. Friend winds up, I hope he will be able to assure us that work is being done to put that firmly into place.

As to the direction in which we should move, I agree with those who say that we need to look again at our institutions in the modern world, especially the International Monetary Fund. In the first place, I wonder whether the International Monetary Fund should be placed under tighter political command. To expect it to operate in response to directions from more than 100 countries seems absurd. It is, of course, good that there has been an increase in subscriptions. The Chancellor, as chairman of the interim committee, deserves every congratulation for his part in that.

It is right for the moment to use the IMF as an arbiter and disciplinarian so that the commercial banks can come in behind it as may be necessary, but we need to consider whether the IMF in its present form is adequately constituted to deal with the problems of today. The perils are by no means over. There is the risk of a debtors' club, which could impose terms on the lenders in the Keynesian model. The House will remember the example that I have in mind—where one is in a position of strength the more one owes. There is the risk of restrictive regimes imposed by the IMF with the implications for world trade which follow from that. To sum up, the cost of the folly of our unpreparedness is not yet fully counted.

By no means the least of our problems is the breakdown of the Bretton Woods agreement. That is not the cause, but it has certainly resulted in the persistently misaligned exchange rates and the exchange market volatility to which I have referred. It is extraordinary that the United Kingdom has had no declared exchange rate policy or target. I have never understood why that was. If the target is not appropriate this week it can be changed the next, but to have a complete apparent vacuum of policy is incomprehensible.

To put the matter as simply as possible, I should like to lock up the wisest money men and economists in the world and demand that they reappear only when they have a replacement solution. To put it another way, it is essential that a formally accepted international commitment to exchange rate targets should be agreed if stability is to be achieved in future. Certainly it would be difficult of achievement but the problems are vastly less than the dangers of being without it. All our planning is for 1984 or the end of this decade. What is needed is to find solutions more promptly than that.

Reverting to the domestic, tight domestic monetary policies—now somewhat discredited, as we all know, as an exclusive remedy if not as a panacea; they never were and never should have been pretended to be—have not been co-ordinated among nations, especially with the United States. The result is that world purchasing power is less than expected, the recession is more severe than expected and no apparent end is in sight. I take interest rates as one example. There is no greater discouragement to economic activity in the United Kingdom or in any other country than high interest rates. In the United Kingdom, 5 per cent. real interest rates are intolerable. They are at the highest level known in recent history. The sooner thay come down, the better.

The carrying costs of debt to many developing countries are insupportable. All that we do is to impoverish the people who should be our customers. Unless and until we address ourselves directly to the realities of today's monetary systems—their impact on trade, their disadvantages and the restrictive practices that follow in their train—the world will have problems. There is a need for a clear analysis and examination of the world's monetary systems. The world has been slow to react to these problems, which have been evident for some time. One useful result of this debate may be to focus attention in this country on the work that needs to be done internationally. I hope that the United Kingdom will be a leader in this process. The dangers are real and dangerous.

At home, the Government have undoubtedly substantial achievements to their credit—the reduction of inflation, the real increases in productivity and the new realism that is abroad in our land. Make no mistake—we dare not falter in our declared course. Britain's industrial competitiveness reduced by 50 per cent. between 1979 and 1981. Sterling's 12 per cent. devaluation in the past two months hardly compensates for that.

What must be done? We must teach our people that we are living in a new industrial revolution. We must come to terms with it. We must succeed in that environment. That was a point made by the right hon. Member for Down, South.

I cannot and do not accept that, because of world recession, an increase in unemployment in the United Kingdom is inevitable. I deplore the fact that the Government's estimates, contained in the autumn statement, are for an increase of 300,000 this year. I refuse to accept that. So should the House of Commons. So should the Government. The prospect for too many young people and for older people is awful. Like unemployment, the fact that we now have the worst level of manufacturing output for 17 years is also unacceptable.

It is our task to give our people hope. That is our duty. I am sure that it can be done. First, as I hope I have shown is possible, the conditions should be created for growth internationally, chiefly by replacing confusion and doubt with stability. At home, as I shall argue until it is done, there should be a programme and a crusade for national recovery. That, too, is feasible. I beg my right hon. and learned Friend the Chancellor and Ministers at the Treasury to pay some attention to the first report of the Select Committee on the Treasury and Civil Service for this Session dealing with the Government's autumn statement. I refer particularly to paragraph 48, which states:
"In previous Reports we have pointed out the falling share of capital expenditure in total public expenditure".
I shall quote the figures for my right hon. and learned Friend the Chief Secretary to the Treasury sitting on the Government Front Bench. In 1976ߝ77, total public fixed investment as a percentage of total public expenditure was 17·7 per cent. The plans, at constant prices, for 1982ߝ83 represent 11·4 per cent. only. The paragraph goes on to state that the estimate in the autumn statement shows that the local authorities in 1982ߝ83 will overspend on current account by £1·5 billion but underspend on capital account by a similar amount. That is a disgrace. The Government should take action. Paragraph 49 states:
"Local authority expenditure has in fact displayed a continual tendency to fall as a share of total public expenditure."
Why should these trends not be reversed? We need a substantial capital programme, an explosion and a blitz on capital work. There is no shortage of private finance. There is no need to create inflationary tendencies as a result of doing what we all know needs to be done. There is no shortage of capital for good ideas. Heaven knows, capital expenditure is badly needed physically. All that is required is imagination and determination. I am confident that my colleagues will show both, on the domestic scene and internationally. I hope that they will make a publicly declared new year's resolution to do so.

7.15 pm

It has been valuable and encouraging, at any rate for me, to be present throughout this debate and to listen to all the generous minded and imaginative speeches that have been made. The right hon. Member for Down, South (Mr. Powell) was right on the ball when he reminded the House of the completely new problems that this country faces and to which it is not addressing itself—namely, the consequences of being able to enjoy a surplus on our balance of payments in spite of manufacturing industry being so sorely stricken and still in serious decline. There is a great deal of work to be done in spreading the leisure rather than concentrating the misery on the unemployed.

I touch only briefly on the problem. I have no complete answer. Many of these temporary and peculiar circumstances will disappear when North Sea oil begins to disappear. It is a major problem for a highly complex society to try to adjust the whole pattern of social life for what will perhaps be only a relatively short period so far as we know. I wish that the House could spend more time debating significant problems of this kind. We on the Liberal Benches do not pretend to have any comprehensive answer. It is more important that, in the mood that has prevailed in the House today, suggestions and solutions should be pooled.

It is immensely reassuring to know that hon. Members on both sides—the hon. Member for Oldham, West (Mr. Meacher) was an exception—display a firm determination to resist protectionist measures and pressures and to retain, so far as possible, the open world trading system on which this country depends so greatly.

The debate has exposed the frailty of the Government's position and has shown how easily the achievements that they claim can disappear. The Chancellor of the Exchequer put a brave face on the likely effect on inflation of the recent perturbation in the exchange markets. The right hon. and learned Gentleman overlooked the fact that his own chief economic adviser, Mr. Terry Burns, when he was examined by the Treasury and Civil Service Committee on 16 November 1982 and was specifically asked what would constitute a major change in the exchange rate assumptions on which the Government's autumn forecast under the Industry Act 1975 was based, replied:
"I think I would say, as far as I can take it, anything less than 5 per cent. strikes me as being clearly not major; anything over 10 per cent., say, begins to be clearly major."
When the Government's chief economic adviser says that 10 per cent. depreciation is the beginning of a major change—we have now depreciated by between 12 and 13 per cent.—it is hollow for the Chancellor to say that there are special circumstances that will somehow prevent those conditions greatly increasing the upward trend of inflation.

I shall not detain the House with the measures that I and many other hon. Members believe that Britain can take by itself. It is a pity if we must take steps by ourselves but there are some measures by which we could pull ourselves up by our own bootstraps. My party has estimated that perhaps 1 million jobs could be restored by domestic programmes of the type that the right hon. Member for Taunton (Mr. du Cann) spoke of when he dealt with national capital assets, which are themselves in a wretched state.

I agree with the right hon. Member for Stepney and Poplar (Mr. Shore) when he talks of the value of bringing down the international value of sterling. As usual, however, key evidence of measures to restrain trade union monopoly pressure in important industries was missing from his programme. In the past, that pressure has destroyed almost all of the advantages of depreciating sterling after a year or two. The Labour Front Bench must face that fact. Until the Labour party puts something in its programme to deal with that immense leakage, its programme will not be credible.

I should like to be in the fashion of today's debate and refer to global circumstances. That is the only realistic context in which we can debate today's subject. We are the custodians of one of the greatest trading currencies in the world, and British public opinion is far more educated about the key importance of currency values than people in the United States can ever be expected to be.

If one lives in the middle of Iowa, one is not brought up to think that one's life depends on the exchange value of the dollar. British people, however, travel to Spain and other places on holiday and have a realistic appreciation of the subject. For the Government to talk about world circumstances as though they are the weather and for them to suggest that we can only put up a large golf umbrella, or get our husbands to do so, to protect us against the world is not the mark of a great nation under allegedly great leadership.

It is high time that Britain got away from the parochial, nationalistic and jingoistic attitude to which the alliance amendment refers and tackled some of our world responsibilities. We should discover concerted measures for economic expansion and for the proper alignment of exchange rates. Above all, we must ensure that we do not embark on competitive devaluations, which played such an awful part in the years of economic chaos that bred Hitler and Mussolini and led to the second world war.

We should also bear in mind the appalling state of primary producers. In some cases, they cannot pay even the interest on their debts out of the product of their entire world sales of raw materials because their markets are so depressed and because of the threat to world banking. No one wants to exaggerate the banking problem for fear of contributing one scintilla to international fright. But it is no good avoiding the fact that banks are terribly exposed. They have taken on the debts of sovereign countries with little knowledge of what they are doing.

It is fashionable in the House—there is some reason for it—to deride professional economists when they descend into the dusty arena and try to prescribe for the world's problems. It is also fashionable to say that they never agree with each other. But one of the most encouraging results of the Treasury and Civil Service Select Committee's visit to Washington was that we were presented with an impressive document that had been agreed by economists and leading economic advisers from 14 countries. They came from as far afield as India, Japan, Europe and the United States. The document is a plan to promote global recovery. It echoed the sentiments that hon. Members have expressed today—the need for concerted international action. These experts believe that Great Britain can play a considerable part in that by leadership, by bringing its own policies into line with civilised remedies.

One of the suggestions in the annexe to this report has not been ventilated today. It is not enough to bolster up banks that have over-lent to sovereign States. That may be a palliative that will prevent a crash. We must give thought to new and better ways of lending on reasonable, not Shylockian, terms to those desperately needy countries.

One suggestion is that savings institutions around the world, especially those in the United States and Britain, have a contribution to make. The Western world has enjoyed prosperity ever since the second world war. Our enormous savings institutions should accept far more global responsibility than they do. Many of them, such as pension funds, have liabilities at a long distance in time. If they are insuring a pension for a worker who is only in his twenties, their liability date is much longer distant than anything that the banks will consider. It has therefore been suggested that the resources of those institutions should be harnessed in a new way to lend to under-developed countries. That would be more satisfactory than leaving those sovereign States at the mercy of banks.

Anyone who, like me, has had experience of a fairly large business that employs a substantial number of people and which is utterly dependent on bank finance that might be withdrawn the next day—albeit only in theory—knows what an appalling inhibition that is when one is trying to develop. It is dreadful for Governments of underdeveloped countries to be weighed down with the nightmare of debt burden.

The Government should take a more internationalist stance. They should be less parochial and nationalistic. They should recognise that recovery for Britain, as for the rest of the free world, depends on concerted global action.

7.28 pm

The events of the past few weeks have almost inevitably thrown the spotlight of political debate about economics back on monetary policy. Today's debate has reflected that.

Whenever I hear the right hon. Member for Stepney and Poplar (Mr. Shore) talk about monetary policy, it occurs to me that he seems unable to resist any argument that comes to hand which can be used against my right hon. and hon. Friends on the Front Bench, however inconsistent it may be with arguments that he has used previously. A good example of that this afternoon was his argument that the pound had been over-valued over a long period, followed by his statement that it was a mistake for my right hon. and learned Friend the Chancellor to remove exchange controls. He did not explain how he would resolve the obvious inconsistency between those two assertions. If we had not abolished exchange controls, the pound would have been pushed to even higher levels.

That is one example of the wider failing of all speeches from the Opposition Front Bench in recent months about monetary policy. They have never addressed the central issue—that is, however much they may disagree with the Government's monetary policy, what would they put in its place? We are entitled to know, as are the electorate if it is to be an election year, what yardsticks of monetary policy the Opposition would use if they formed a Government. They have never made that clear, and the House and the country are entitled to know.

No one could argue that the Government have not had a clear policy. Not all of us have been entirely enthusiastic about it while the Government have been in office, but the policy has been clear. I compliment my right hon. and hon. Friends in the Treasury team. The policy has responded to the arguments about it.

It would be instructive to trace developments since the Government took office. In the early days the yardsticks used to govern our monetary policy were extremely mechanistic and resulted in wrong policy conclusions. My right hon. Friend the Leader of the House said at that time that sterling M3, our chosen indicator of monetary policy, was a wayward mistress. Perhaps a more dispassionate way to describe its failings would be that it was an inaccurate meter of exactly how tight was monetary policy in the economy. It gave an entirely false impression of whether monetary policy was lax or tight. Because we followed that chosen meter, we made the wrong policy responses to what we thought was a lax monetary position, but other indicators at the time showed that it was not as lax as the sterling M3 statistics suggested.

Opposition Members have tended to continue that argument as though it was a current criticism of Government policy. It has become ancient history. The Government no longer pursue a monetary policy devoted to maintaining a target for sterling M3. There is a danger that in debate we deal with yesterday's problem and do not move forward to deal with the new position created by the Government.

It is no secret that at the time of the previous so-called sterling crisis in the autumn of 1981 the Government moved their monetary policy on to a rather wider base. From then they did not govern their monetary responses purely by reference to sterling M3. They took account—at first tacitly, and later explicitly—of other indicators of the course of monetary policy.

That was confirmed in the Budget in March last year when my right hon. and learned Friend used a phrase that it would have been inconceivable for him to have used three years earlier. It was that those who wished to know about the implications of his remarks on the policy for sterling M3 could find that arcane statistic buried in the deepest recesses of the Red Book. It is inconceivable that he could have taken that view three years earlier. The signal that he gave in March last year was that his monetary policy was more broadly based and not purely concentrated on a single statistic. I welcomed that.

The past 12 months proved that it is impossible to argue that as a result of that more widely based monetary policy we continued with the tight monetary background that was a characteristic of the Government's early months in office.

The object of tracing that development, which I believe to be historically accurate, is to suggest to the Minister that the time has now come for the Government to take the evolution of their monetary policy a stage further. As the policy was described in the Budget last year, the Government were to look at a whole range of monetary aggregates, including the exchange rate. In the circumstances that we now face, the Government should move again and regard the exchange rate not as purely another measure of monetary policy, but as the lead measure by which the tightness or laxity of monetary policy is judged.

I was struck by what my right hon. and learned Friend the Chancellor said this afternoon about the stability of exchange rates as a concept. He said that that was accepted as desirable by finance Ministers around the world. He clearly stated that he regarded exchange rate stability as desirable, but he said that that was realistic only if it was seen as a consequence, and not a cause, of economic policy co-ordination by the major industrialised countries. I do not think that that is true. It is a chicken and egg problem—oscillating exchange rates make policy coordination in the major industrialised countries much more difficult. It is necessary to look towards currency stability and policy co-ordination as two sides of the same coin, and not as one being a John the Baptist for the other.

The time in the evolution of the Government's monetary policy has now come to regard currency stability as their principal monetary objective and as the principal meter by which the laxity or tightness of monetary policy is judged. Having begun with sterling M3 as our principal measure, and moved away from it, we should now continue that move by regarding the exchange rate as not the exclusive, but the principal, measure of the laxity or otherwise of monetary policy.

It is often said that Governments are relatively powerless to influence the course of events in foreign exchange markets. I find that hard to accept. There can be few markets where the interplay of forces of supply and demand are more perfect than in a foreign exchange market. I accept that the Government can only indirectly influence demand for a currency, but they can obviously and indirectly influence supply. It is not open to Treasury Ministers to argue that they cannot influence the supply of money when that has always been the cornerstone of their economic policy. The original policy was to influence the expansion of money supply by reference to sterling M3. We should now influence the expansion of money supply by reference to the foreign exchanges and to a stability target for sterling.

It is conceptually impossible to argue that Governments have only limited control over foreign exchanges. History and experience both in this country and around the world have disproved that assertion. Perhaps the most recent and successful attempt, over a long period, of a Government to hold down their exchange rate for a clear purpose was the Japanese policy towards the yen, which has only recently been relaxed to allow it to rise. Without examining the background to the Japanese economy, it is almost impossible to understand why, when a country is running a large current account surplus, it nevertheless ran a weak currency.

The OECD report on Japan, published in the middle of last year, throws considerable light on how the Japanese managed to hold their exchange rate down for a specific purpose. The report states:
"The long-term capital balance swung from a net inflow of $2·3 billion in 1980 to a net outflow of $9· billion in 1981. Reflecting the relaxation of capital controls … the relatively easier monetary conditions prevailing in Japan and large interest rate differentials against the yen, the net accumulation of long term foreign assets by Japanese residents more than doubled".
The mechanism by which the Japanese were able to hold down their exchange rate was precisely the policy that the right hon. Member for Down, South (Mr. Powell) described as having nothing to be said in its favour. I doubt whether the Japanese would agree with him. They are investing their capital surplus in markets around the world where they think that they can get the best return on it. In so doing, they are expanding the very markets to which they seek to export their manufactured goods. Some hon. Members may decry that economic policy but, looking at the results in Japan, I do not think that it can be easily dismissed.

I do not underestimate the difficulties of acting directly on the foreign exchanges. Only a fool would do that. Confidence is important, and there are many extraneous factors—the Shore effect may be one of them—that influence a foreign exchange market. The strength of the underlying supply and demand factors cannot, however, be indefinitely denied.

To argue that something is possible is not the same as to argue that it is desirable. The Japanese experience shows why I consider such a policy desirable, but I should like to give a wider argument.

It is no accident that world trade grew most consistently at a time when international currency movements were restrained within the narrowest limits. In the second half of the 1960s, world trade grew in volume terms by 9 per cent. In the 1970s it grew by 6 per cent. in volume but in the past three years it has fallen by 1 per cent. Seeing those statistics, we cannot ignore the fact that the decline in the rate of growth of world trade was almost exactly contemporaneous with the decline in discipline of foreign exchange markets. If that is a coincidence, it is a remarkable one, but I do not believe that it is a coincidence.

Before I became a Member of Parliament I was in charge of an export department. I was a practitioner of the world trade statistics that I have just quoted. As an exporter, I realised that it was unrealistic to regard exporting simply as a matter of flogging a surplus. It is not a matter of getting on a plane to go and sell something when the currency movement is suitable or the price is right. The Japanese have invested over a long period in market development, market support and after-sales service. Building a market is a long-term investment, not a short-term response to price movements on the foreign exchanges. If it is a long-term investment, anyone making key decisions for world trade is fundamentally interested in the stability of the currencies in which he has to trade and particularly in the relationships between them.

I share the Government's deep commitment to the importance of world trade—and free world trade—and their recognition of the importance of an expansion in world trade for our economy. Much has been said about the importance of not deteriorating into protectionism and of resisting both tariff and non-tariff barriers to trade. I suggest that perhaps the most important single non-tariff barrier to trade now is the fact that no exporter ever knows until he actually receives the cash across the foreign exchanges the real price that he will receive for his product. Fluctuating exchange rates are a very important non-tariff barrier to trade, so if we are interested in free trade we should be interested in removing that barrier.

There is another reason why stable currencies are important for this country as a yardsick of monetary policy. As I have emphasised throughout my speech, I am principally interested in a yardsick of monetary policy rather than in the Opposition arguments about competitiveness. I am interested in the means by which we define the monetary policy that we wish to pursue. Monetary policy is a vital discipline for anyone trying to run a modern economy because it defines the parameters within which a modern economy operates. Therefore, I believe that a monetary policy defined by reference to the exchange rate has a greater chance of achieving its objectives because it is clearer, less ambiguous and more easily understood than any other measure of monetary policy so far developed.

I refer briefly to some of the arguments advanced by my right hon. Friend the Member for Taunton (Mr. du Cann) and the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) about the methods by which the currency stability for which I argue can be secured. We cannot, of course, simply conjure out of thin air today a revised and renewed Bretton Woods agreement. The world has moved on and we must deal with the world as it now is. I believe that the tripod approach outlined by my right hon. Friend the Member for Taunton and the right hon. Member for Hillhead of the European monetary system, the dollar and the yen is the first essential building block for the currency stability that I seek.

Like my right hon. Friends the Members for Taunton and for Sidcup (Mr. Heath) and many others who have spoken, I attach great importance to international financial reform and its role in promoting the expansion of world trade and reducing the risk that some major Western banks now face in their investments, some of which they must now regret, in some newly industrialising and less developed countries.

Several of those who have spoken referred to the recent election of my right hon. and learned Friend the Chancellor as chairman of the interim committee of the IMF and I join them in congratulating him. I suggest that that position gives my right hon. and learned Friend a unique opportunity to point the way for the world towards the international currency stability which I believe is the essential bedrock on which to build the re-expansion of world trade and to deal with the problems of international indebtedness to which my right hon. Friend the Member for Taunton referred. My right hon. and learned Friend has a great opportunity to show the world the way forward and I very much hope that he will take it.

7.49 pm

I am pleased to follow the able and courageous contribution of the hon. Member for Loughborough (Mr. Dorrell). It was an attack on the policies of his Front Bench in the guise of an attack on the policies of the Opposition Front Bench. I agree with a great deal of what he said. By contrast, the speech of the right hon. Member for Down, South (Mr. Powell) was agreed with almost in total, judging by the nods of agreement from the Prime Minister.

I hope the House will forgive me if I leave the global economic position to one side, say a little about the national economic position and concentrate more on the position in Merseyside in terms of the economic crisis and how it affects the people of Merseyside and Merseyside itself. I do so for three reasons. My first reason—perhaps it is the least important and least serious reason but none the less it is a reason—is that, having been called to speak in a debate which has so far had contributions from so many former Prime Ministers and so many aspiring Prime Ministers, it is not likely that the national press will report very much of what I have to say, although the Merseyside press is likely to do so if I say something about Merseyside.

Secondly, an examination of Merseyside does three things. First, it gives the lie to what has been said by several right hon. and hon. Members on the Conservative Benches about the British economy being strong. I believe that it was the right hon. Member for Taunton (Mr. du Cann) who said that the British economy was strong. I say to him "Tell that to the unemployed in Merseyside". If he really believes the economy is strong, he should go for a walk or a drive around the area. The national decline in industrial output of 20 per cent. is only too apparent in Merseyside. Factories such as Tate & Lyle and Courtaulds have closed down. The docks are in decline and unemployment continues to increase, as it did under previous Governments, both Labour and Conservative. However, it has accelerated dramatically during the past three years under the Government.

The right hon. Member for Down, South referred to the surplus of £6 billion to £7 billion per annum on our balance of trade. He said that it did not really matter that a large proportion of that surplus was to do with North Sea oil revenues, and that it was not a serious consideration to examine how that surplus was made up. The implication seemed to be that that surplus on the balance of trade showed that Britain was in a stronger and healthier position than perhaps the Labour party and Labour Front Bench spokesmen were suggesting.

I was not arguing from the position of the current balance as to any prosperity or strength of the British economy.

To have the phenomenon to which the right hon. Gentleman referred—a £6 to 7 billion surplus on the current account—at the same time as industrial output is down 20 per cent. shows that the significant thing about that balance is that it is made up of North Sea oil revenues but that those revenues are not accruing to the benefit of British industy or to the benefit of the British people. It is that balance, as a result of North Sea oil revenues, which hides the very economic crisis that Britain is in and which the Government face. Where is the wealth going, which comes from North Sea oil and which should accrue to the nation from that balance of trade surplus? It certainly is not going to British industry to re-equip and modernise it; it certainly is not going to the British people because 3½ to 4 million people are unemployed. In my constituency 26 per cent. of the male population are unemployed—a phenomenally high figure.

Merseyside's problems are the nation's problems written large. Merseyside has been in decline for the past 30 years. Private money has been encouraged to invest in the area to create jobs but that has failed. Previous Labour Governments gave incentives. Merseyside has development area status, which gives grants to new industries. Some industries did come but they have upped sticks and left. They are not coming any more. Unemployment is increasing and the monetarist policies of the Government are doing nothing to create new jobs or even to maintain the existing jobs in Merseyside.

A new approach is necessary. Already in the debate Labour Members have put forward the national policies that the next Labour Government would pursue, including exchange controls, selective import controls and massive amounts of increased public expenditure to re-equip British industry and to rebuild our public and social services.

In addition, as Merseyside is in a disadvantageous geographical position and in a difficult position to benefit should any upturn in the economy come, and as it has never had a strong manufacturing base but has been a port-led economy with a service and commercial base rather than a manufacturing base, special policies must be pursued by the next Labour Government to help revitalise Merseyside, to create jobs and to enable Merseyside to benefit from the national economic policies that the Labour Government will introduce, which will benefit other parts of the country far more easily than Merseyside.

Firstly, a policy must be introduced for the port and the docks. The future of the docks is crucial for the future of Merseyside. Instead of buying off jobs with public money, which is what is happening at the moment, the next Labour Government must set about to revive the fortunes of Liverpool docks. As a pre-requisite for action, the docks must be taken into public ownership. We need a policy for directing shipping so that Liverpool receives its fair share of trade. In order to prevent foreign ships so directed to Merseyside going to Rotterdam or Hamburg, we must reduce the handling costs and charges at Merseyside by adopting the same type of policies as are adopted by Hamburg by giving some Government support and subsidy but by taking away costs, such as lighting costs and the cost of dredging the estuary and maintaining the roads and highways in the area of the port, which at the moment are borne by the port but which should be borne by the community.

Britain's withdrawal from the Common Market would benefit Liverpool considerably and is crucial if we are to revive the fortunes of Merseyside. Merseyside is geographically in the wrong place with regard to our present pattern of trade with Europe. We used to be able to import cane sugar as we wished from the Caribbean. It would go through Merseyside but now, because of the common agricultural policy, Lomé agreements and so on, not only does the sugar not come into Merseyside but neither does the rum. Tate & Lyle has closed as a consequence and the docks have declined. If Britain could buy its food where it best suited the British nation, in the markets of the world where food was cheapest, the docks in Merseyside would benefit considerably.

Will the hon. Gentleman accept that, regardless of the arguments for or against the Common Market, even if Britain came out of Europe there is no indication that our trade pattern would be such that Liverpool would inevitably benefit, any more than he could invariably direct, to use his own words, trade to that port in preference to many other ports?

I agree with the sedentary intervention of my hon. Friend the Member for Newham, North-West (Mr. Lewis). One can plot the rapid decline in Merseyside's fortunes from our entry into the Common Market and the gradual implementation of the transitionary arrangements for imports of food from Commonwealth and other countries. It is a fact that 75 per cent. of the activities of the Common Market are to do with the common agricultural policy and food and not with the exports and imports of manufacturing industries. There is no doubt that Merseyside would benefit considerably. There are already too many ports in Britain. That position would not alter but a national plan for the direction of shipping and the public ownership of all the ports would help Merseyside considerably.

Secondly, there are only about 24 miles of Britain's considerable miles of roadway on which there are tolls. All these tolls are levied on estuarial crossings. They are levied on the crossings under the Mersey and everyone on Merseyside, including all Members of Parliament in the area, of all parties except those who become Ministers, is in favour of abolishing them. If we want to encourage trade and industry on Merseyside, we need to abolish the tolls. In so doing we shall help to provide a better communications system.

Thirdly, it is meaningless for Merseyside to have development area status if the 22 per cent. Government development grant is not available to service and commercial concerns, either new ones arriving on Merseyside or existing ones that are expanding. Currently, grants are available only to manufacturing industries. This policy needs to be altered significantly.

Fourthly, new jobs need to be created by the establishment of a new Merseyside enterprise board, which, along with the Department of Industry, would create new publicly owned industries on Merseyside. Local planning agreements within the framework of the national ones to which the Labour party is committed could be negotiated and enforced by law between private industry and the new enterprise boards.

Fifthly, the local authorities should be given real powers to develop new municipal enterprises of any sort on Merseyside, especially in the building industry, with the expansion of direct labour departments, the baseload of these departments being new housebuilding and a modernisation programme, as well as meeting the needs of the homeless. This would help to reflate the economy through public expenditure without sucking in consumer goods from abroad. It would also employ the unemployed building workers.

Sixthly, the next Labour Government should develop a regional alternative—I hope that it is not too late for the present Government to do so—to the expensive and unwise proposal to build a large third London airport. Liverpool and Manchester airports could work more closely together. That would bring trade and prosperity in some measure to the region and to Merseyside.

Seventhly, the inner city partnership machinery and the Merseyside Development Corporation should be brought together into a new, democratically accountable Merseyside development agency. The management committee of the agency should be composed entirely of elected councillors and, perhaps, Members of Parliament as well, who are accountable to the public through the ballot box. The areas covered by the organisation should be extended and should include all dockland and the inner city areas of Bootle, Litherland and, of course, Walton. It should be given real powers by the next Labour Government, if it is set up, to create new concerns and industries and to create real and lasting jobs.

Eighthly, it is important in any area to have an efficient public transport system if the entire community is to benefit and not only those who use public transport. An efficient transport and communications system is a prerequisite for commercial and industrial growth. Therefore, the Merseyside county council needs the freedom and public support from Government to provide an efficient and cheap public transport system. This should be done by the next Labour Government.

Ninthly, rail services between Liverpool and the rest of the country, especially London, should be greatly improved and upgraded and not cut back. Fast trains should be introduced into areas such as Liverpool to bring more prosperity and easier communications.

The tenth point in my programme for Merseyside for the next Government is the reinstatement of the support that has been lost through massive cuts in rate support grant. These are the cuts that the previous Secretary of State for the Environment, who has moved on to new pastures, imposed on all Merseyside councils, thereby causing rates to be increased. The cuts should be reversed. More grant should be given to councils in areas of high unemployment and social deprivation such as Merseyside and less should be made available to shire counties in areas such as Essex, Cheshire and Kent.

Merseyside will stand a chance of surviving through the 1980s only if a Labour Government are elected that introduce and implement the policies that I have outlined for Mersey side, along with national economic policies that are in Labour's plans for creating jobs and in the alternative economic strategy. Without these policies the decline will continue, unemployment will continue to increase and there will be an even greater breakdown in law and order. Time is short, but the people on Merseyside, a Labour Government, Labour councillors in the area and others of good will can make a difference.

It is only the Labour party that is offering a clear alternative to the Government's policy of mass unemployment. The Social Democratic party and the Liberal alliance are not. Both parties are certainly committed to continued unemployment. My hon. Friend the Member for Liverpool, Walton (Mr. Heffer) has recently outlined in more detail than I have presented to the House the effect that Britain's membership of the Common Market has had on Merseyside. How any member of the SDP or the Liberal alliance can ask for votes on Merseyside is beyond me, bearing in mind the parties' commitment to Europe. Despite the public relations exercise mounted by the Government, and the former "Minister for Merseyside", I believe that the Government have already written off Merseyside. Their claim that there is no alternative to their no-hope policy is a blatant attempt to deceive many of the British people into accepting bread-line living conditions. The only money to be put into Merseyside has been used to bribe workers into selling their jobs. A garden exhibition is planned while real industry has been closing. As I have said, Tate & Lyle and Courtaulds have already gone.

The onus is on Labour Members and the Labour party, when advancing the policies that I have outlined, to answer the question "Where is the money to come from?" If the public opinion polls show anything, they show that the British people support the policies for which the Labour party stands and is advocating. They show also that the Conservative party has a national lead in the polls over the Labour party. The anti-Conservative vote, which is split between the alliance and the Labour party, is far greater than the pro-Conservative vote. In areas such as Merseyside, the north of England and Scotland, the Labour party has a lead in the polls over the Conservative party. We do not have the national lead in the polls that we need because we have not convinced the electorate, although it supports the main parts of our policy, that we shall implement the policies for which we stand if a Labour Government are elected. One of the reasons for this is that we have not fully put across to the people the answer to the question "Where will the money come from?"

This is understandable when the Prime Minister, the Chancellor of the Exchequer and other Government spokespersons put forward a simplistic view of the economy, which has been advanced this afternoon and this evening once more. It is suggested that the nation is run like a family household and that no family household should borrow money because that is bad. They say that a Labour Government would have to borrow. It has been said this evening that a Labour Government would go on a borrowing and spending spree. This allegation needs to be answered. The simplistic and Mr. Micawber approach—income £20; expenditure £20. 0s. 6d: result, bankruptcy—is not real. Most households borrow, if for no other reason than to buy the house in which they live. They are on to a good thing as long as the money that they owe on the asset that they are buying with the money that they have borrowed is less than the value of the asset that the money is used to purchase.

The same is true of the nation. The public sector borrowing requirement is presently oscillating between £10 billion and £14 billion. The Government are still borrowing, but now the money is used to pay unemployment and social security benefit. The money is being borrowed to pay weekly bills, not to invest in the house or in capital expenditure. I make no excuse for saying that the next Labour Government will borrow to put people back to work and to produce goods and services—the real wealth of the nation—and to create capital assets that will increase, not reduce, the wealth of the nation. The one thing that the Prime Minister has in common with the Militant Tendency, about which we read so much, is their detestation of borrowing.

We have been speaking in abstract terms about the economy. I now speak about the economy in relation to the people about whom we are truly anxious—the unemployed, people in need, the badly housed and children who are leaving school and who cannot find work. One of the Merseyside unemployed has sent a small poem to me. It is not very long but it adequately illustrates the plight of Merseyside's unemployed:
"She's never looked for work or stood in queues,
Been snooped upon, or given grants for shoes;
Not once subjected to the deep despair
Of making both ends meet on empty air,
She's never seen her husband's self-respect
Ground into dust from government neglect,
Nor had to face a future, grimly bleak,
On twenty-five pounds twenty pence per week.
She's never been means-tested by the state;
Grilled by the deemsters on things intimate,
Has had to pour her heart out, simply for
Those rights which rarely ever reach the poor,
Whilst leaflets couched in fancy prose, contrive
To keep the myth of gobbledygook alive.
She's never had to see her children swop
The classroom for the subterfuge of 'Yop'.
Or else, because they see no prospect new,
Seek solace from the act of sniffing glue.
For who could now believe, without a doubt,
In corners turned and levels bottomed out?
From Tory doctrinaire all such sins flow,
And what was Circe once is Thatcher now."

8.6 pm

Whatever merit may be attached to the speech of the hon. Member for Bootle (Mr. Roberts), it made no contribution to supporting the Opposition's motion which is designed to criticise the Government's interest and exchange rate policies and to urge the reimposition of exchange controls. I am not surprised, because that has not proved to be much of a case.

The debate has properly widened to more fundamental issues. In the past, I have had occasion to be critical of the Government's monetary policies. Certainly it was a mistake to pitch our interest rates in 1979ߝ80 so far above the then United States interest rates, especially when the pound was buttressed by high oil prices. I believed then that to push the pound to more than $2·4 was excessive and damaging to our trade and industry.

I share many of the doubts expressed by other speakers about tight monetary policies. My doubts were reinforced by my belief that the monetary aggregates that were being used—whether M1, M2 or M3—were completely unreliable. As my hon. Friend the Member for Loughborough (Mr. Dorrell) said, what I used to call motorway madness has now finished and sounder monetary policies now seem to be in operation.

Whether pursued by a Labour or Conservative Government, I have always found extremes of monetary policies, like the case for flexible exchange rates, excessively mechanistic and irrational. It is not always remembered that the Labour Government, when the right hon. Member for Ebbw Vale (Mr. Foot) was Chancellor, pushed up interest rates—[Interruption.] I forgot for a moment that the Leader of the Opposition is a dead body over which the candidate for Bermondsey has been selected. I should have referred to the right hon. Member for Leeds, East (Mr. Healey).

There was then an interest rate of 16 to 18 per cent. In 1976, I wrote to The Times saying that interest rates at that level would prove to be a disaster. I was supported indirectly by the right hon. Member for Down, South (Mr. Powell) who, speaking to the junior chamber of commerce in Bangor, said that no country could prosper or indeed survive with an interest rate of 10 per cent.

There is no simple monetarist cure for our fundamental economic problems. It has proved to be a dangerous and a damaging illusion, as my right hon. Friend the Member for Taunton (Mr. du Cann) said, to believe that one can divorce monetary policies from general economic, fiscal and social policies.

Unfortunately, just as the Government are making a half U-turn, the Opposition have chosen to adopt a monetary policy that is round the bend. I cannot as readily as the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) acquit the Opposition of not having had a seriously damaging effect upon the exchange rate by their announcement that a Labour Government would devalue by 30 per cent. in two stages. If we had a Labour Government, the pound would plummet and we would soon be back in the arms of the International Monetary Fund. It is all very well to say that it is highly improbable that the British people would turn to a Labour Government who advocate as a deliberate policy the devaluation of the pound. Nevertheless, the belief that the Opposition are so irresponsible as to put forward that policy has been very damaging.

Artificially to depress the exchange rate, which is now arguably too low, would not help. It would be just as damaging as artificially pushing up the exchange rate with high interest rates. Any stimulus to exports, as the right hon. Member for Leeds, East has argued from time to time, is soon offset by rising import costs. Whatever view one takes of the Government's monetarist policies, we must accept that our exports depend upon improving the competitiveness of industry, on our capacity to innovate, on the maintenance of quality and on the observance of delivery dates. To try to solve the problem of industrial competitiveness and exports by further devaluation of what is already an under-valued pound would be similar to trying to dry a lump of ice in front of a fire.

Happily, we now have a more flexible approach to monetary policy. I was pleased when a somewhat chastened Professor Friedman recently acknowledged that lower interest rates and lower unemployment would have meant lower Government spending, and higher economic growth would have meant higher revenues, and that on both counts the deficit would have been reduced. However, it is true to say, as other hon. Members have said, that there is no magic in the level of deficit. What matters is what goes into it.

I have been worried about the extent to which the deficit is now made up of high repayments of debt interest. In 1974, the figure was about £2 billion a year. I remember that we heavily criticised the Labour Government when the figure rose to £8 billion, and now it is £16 billion. Equally, the enormous sums that we must pay in social security and other benefits are, to say the least, an unfortunate factor in our budget deficit. I share, and have long expressed, the anxieties referred to by my right hon. Friend the Member for Taunton about the continuing decline in capital investment. We have continually cut capital expenditure, which is a fundamental difficulty with which we must deal.

As to the restoration of exchange controls, it is another illusion to believe that there could be or ever was a magic formula to prevent the rest of the world taking a subjective view of the value of sterling. As my right hon. and learned Friend the Chancellor of the Exchequer said, exchange controls did not prevent successive devaluations under the Labour Government.

No Chancellor of the Exchequer, even a Socialist monetary despot, could be like the man in Browning's poem—
"His world to make, to contract and to expand
As he shut or oped his hand."
We cannot deal with our monetary and economic policies today in isolation from the rest of the world. That is why I join those who express satisfaction at the Chancellor's new role as chairman of the IMF policy-making interim committee. He will serve the country well if he follows the international route outlined by my right hon. Friend the Member for Sidcup (Mr. Heath) and by the right hon. Member for Hillhead.

We must take initiatives in seeking international action to strengthen the world's financial system and to ensure greater exchange stability. Like my right hon. Friend the Member for Sidcup, I hope that the Chancellor will take up the call of Mr. Donald Regan, the Secretary to the Treasury in the United States, to have a new Bretton Woods type conference, which will have to be preceded by intensive work by Government officials and the central banks.

Little purpose is served by having one summit meeting following another with satisfactory communiqués, in the sense that no one can disagree with the terms, but which result in no useful action. The Versailles communiqué was marvellous, but nothing happened. The Bonn communiqué in 1978, to which the right hon. Member for Hillhead referred, was an admirable document, but nothing happened. If this initiative is to succeed, it will need great care in preparation.

I share the views of those who have said that a first stage would be our negotiating to join a developing European monetary system, not to create a wall around Europe, but to build a regional pillar for a reformed international monetary system of the type advocated by Mr. George Shultz in 1974, when he was one of the main authors of the Group of Twenty's report on monetary reform. I share the views of those who welcome his return to the international scene.

There is no doubt, as my hon. Friend the Member for Loughborough said, that one of the best ways to restore international business confidence would be to achieve a method of managing floating currencies so as to avoid these increasingly erratic exchange movements. That will not be easy. I agree with the right hon. Member for Leeds, East who once said that international economic diplomacy is like rowing a boat through treacle. However, the effort must be made, and made urgently.

I agree with those who say that competitive devaluations of the type of which the Opposition are apparently in favour is as great a threat to industrial and economic recovery as competitive interest rates.

It is significant that in this debate speaker after speaker has made reference to the crisis created by the international debt time bomb. It has at last focused attention on the need to strengthen the resources of the IMF and the World Bank and to do something to bring order out of the chaos that many people, including Lord Lever in the previous Labour Government, have been warning the world is likely to happen and has indeed been inevitable.

Today's report from the Bank for International Settlements and yesterday's meeting of the Group of Ten shows the recognition of the need to mount the rescue operation to help debtor countries that have been induced to over-borrow at rates of interest that would once have been regarded as criminal usury. The hon. Member for Colne Valley (Mr. Wainwright) spoke of Shylock, but, as I once said, Shylock would have been a wet today.

You may have seen, Mr. Speaker, that the notorious Mr. Meyer Lansky died last week in Florida. He was founder director of Murder Incorporated, which was a wholly owned subsidiary of the Mafia. He knew something about loan sharking, and obviously made a good business out of it as far as one can judge. He also knew that, to be a loan shark, one has to have enforcers. There is no way that one can go about breaking the legs of international debtor countries. One just has to bail them out. That is what the IMF, the Group of Ten and the World Bank have been doing. They are only postponing a real solution of the crisis.

The principle is clear. We all know that if one owes £1,000 to a bank, one is in trouble. If one owes the bank £10 million, the bank is in trouble. Unfortunately, today there are short-term rescue operations only, when we should be considering how to end the world trade recession that the bankers have helped to create. The ultimate objective of Governments and of central bankers must be to secure substantial increases in international trade.

Last year the president of the World Bank, Mr. Clausen, said that the present fabric of international cooperation in trade, finance and aid may not be able to survive prolonged economic stagnation. However, that stagnation is continuing. The danger remains, and it is grave.

We should recognise that a time comes when international trade is not just business, but politics. There is also a time when politics becomes security. At least a third of the fall in inflation is due to falling commodity prices. It is that that makes it impossible for many of these debtor nations even to repay the interest on their debt. We may hail a fall in the price of sugar as a tremendous victory over inflation and a tremendous reduction in the cost of living, but what price do we put on the fall of a friendly Government in Mauritius, replaced, as it has been, by a manifestly unfriendly one? For example, one cannot ignore the warning, early this month, of the Jamaican Prime Minister who, according to Time Magazine, said:
"If we don't have growth, you will be looking at independent countries searching for the alternatives to the private enterprise economy."
Some Labour Members may welcome that, but I am not pleased to know how the Marxist parties are growing in strength in every Caribbean island.

Another aspect of this problem relates to those who believe in protectionist policies, through which we could somehow isolate ourselves from what is happening in the rest of the world. I do not agree. I share the view of the hon. Member for Colne Valley that Britain, more than most countries, has a continuous interest in generally liberal trading policies.

I am not sure about the views of the Opposition. The right hon. Member for Stepney and Poplar (Mr. Shore) is something of a protectionist. The right hon. Member for Leeds, East only this week denounced beggar-myneighbour policies. I hope that the Opposition will make it clear that they favour a liberal trading policy and that they will give all the support that they can to initiatives on the international scene to try to assist other countries, in particular some of the debtor developing nations.

It is only when we and other industrialised countries are prepared to play an effective role in recreating world trade that we shall have any hope of dealing with our own critical unemployment problems.

Order. Four hon. Members are still waiting to speak. There are 32 minutes left before it is hoped to wind up. If those hon. Members could make eight-minute speeches, everyone will get into the debate.

8.28 pm

Several hon. Members have given attention to questions such as whether the exchange rate should be the dominant indicator that we try to keep stable, whether we should give more attention to the growth of the money supply or whether the rate of inflation, interest rates or the public sector borrowing requirement are the most important considerations. Unless all those policies and parameters come back to the question how they affect people, they will not be all that meaningful in places such as my constituency.

The level of unemployment must not be a residential factor that is allowed to drift one way or another after all the other parameters are considered. In the area that I represent, male unemployment is 22 per cent. In the whole of Wales about 37,000 young people under 20 are out of work. Unemployment in Wales has increased from 7 per cent. in 1979 to 17 per cent. now. We have seen the activity rates falling so that there is hidden as well as overt unemployment. Activity rates for men have fallen from 78·3 per cent. in 1975 to 74·3 per cent. in 1981. There is a tragic waste of human potential. A cancer is running through communities. That is why I believe that the excuse given by the Government that unemployment is universal and inevitable must be questioned.

A number of speeches from both sides of the House have challenged that excuse. Is it not depressingly defeatist to accept unemployment as inevitable at the levels that we are suffering today? It is untrue to say that it is universal. We are going through an international depression, but unemployment is not at the same massive levels in many small independent countries the same size as Wales. The Employment Gazette in December showed that unemployment was 2. · per cent. in Austria, 3 per cent. in Sweden, 1·8 per cent. in Norway, 0·5 per cent. in Switzerland and 2 per cent. in Greece compared with 17 per cent. in Wales. In Japan, which is a larger country, the level is 2ߝ3 per cent. It is 8·4 per cent in Germany—half the level that we are suffering in Wales.

Other countries have not been prepared to accept unemployment at the level that we have had to suffer. When I was in Sweden a few months ago the incoming Government regarded 5 per cent. unemployment as unacceptably high and set about a programme to create 20,000 new jobs a month in public sector works, social schemes and so on to bring down unemployment. It is a myth that unemployment is universal and inevitable.

Another myth that must be exploded is that in the modern technological world, with the present changes, no work is left to be done and there must be fewer net jobs as a result of that revolution. Automation and microtechnology mean that some jobs come to an end, but that does not mean that there must be fewer jobs in total. There will be fewer jobs in some sectors, but not all. If work is ended in one category, it does not mean that no other jobs will need to be done in the community. We need a mechanism to ensure that the wealth that is created by the new technologies is recycled so that other jobs in the community are created and sustained. The same is true of the benefits that come from North Sea oil, to which I shall return later.

Work needs to be done in our community. We need only to look about us to see it. The right hon. Member for Down, South (Mr. Powell) referred to the care of the elderly. That is an increasing problem. Given the demographic factors, it will be a major problem over the coming years. We must consider care for the elderly and disabled. There is a need for more staff in hospitals and day clinics and more home helps. Work needs to be done all round us, but it happens to be work that is not triggered by the present mechanisms. Therefore, we may need to look for a revolution in that direction.

Work needs to be done in the physical environment on repairing and building homes. In Wales we need 60,000 new houses, and 100,000 need to be repaired. Work needs to be done on the building of roads, new training centres, hospitals and clinics. Work needs to be done in the environment, both in inner urban areas and in rural areas.

People who are out of work want to do that work, yet we are paying people to do nothing rather than the work that needs to be done in our communities. As a community, should we not pay more to those people to do the necessary work than for being idle? Is it not fairer to spread the burden of the present depression through the whole community rather than landing it on the 20 per cent. who are at the bottom of the employment market, and, if necessary, increasing taxation to bring those people into employment?

This is something we must not shirk. We must not hide behind the excuse that we can always borrow our way out of the problem. It may be necessary to raise taxation to give people work. We also need to ensure that the level of skills is increased. The number of people in recognised apprenticeships has dropped by a third from 153,000 in 1979 to 114,000 in 1982.

The fundamental question to be asked is what is happening to the wealth that has been created from the oil industry and from the technological revolution? Why has not the wealth been recirculating to bring into employment people who are unemployed? Two major factors are causing the problem to be far worse in the United Kingdom than in other countries. Our exports have grown very substantially in terms of oil. If we are roughly balancing trade with our trading partners, we may be selling oil to them and importing manufactured goods from them to pay for the oil. We are selling oil that has a low labour content and importing manufactured goods that have high labour contents. A few months ago the Prime Minister in Glasgow said that over the last 20 years we had imported manufactured goods to the extent of 1·5 million jobs which was a sobering figure. She said that we cannot indefinitely continue on this pattern or we will have no manufacturing industry left when the oil runs out.

The second question is, what has happened to the capital formed within the economy? I hesitate to cross swords with the right hon. Member for Down, South (Mr. Powell) as I respect his intellect in these matters, but if there is a current surplus within the domestic economy it does not inevitably have to be spent overseas. It must be possible to use the current surplus as capital investment within the home economy, thereby bringing benefit at home and creating jobs. With the lifting of exchange controls, there has been a massive move of capital overseas. Three years ago there was virtually no outward capital movement. Two years ago there was £2 billion net capital outflow and last year it was up to £8 billion—equivalent to a million jobs. One million jobs appear to have been lost in terms of the outflow of investment. Taken together with the 1½ million jobs lost by importing manufactures, that accounts for a large proportion of the present unemployment.

I am not advocating that we become an island and cut ourselves off totally. I am advocating that there is a need for control and planning of these factors. The free-for-all has landed us with the unemployment problem which is besieging communities like my own. That is why we need to look more radically and fundamentally at the questions of exchange controls and parity rates since these are fundamental factors which are causing unemployment in the community.

I am very much obliged to the hon. Gentleman, but one of the hon. Members who had been trying all night to speak became fed up when I spoke of eight-minute speeches and has departed. I want the House to know that speakers will now have a few minutes extra.

8.38 pm

During this debate on the economy, Conservative Members have argued that there is no going back to the failed policies of the 1960s and 1970s. Many hon. Members will agree, which is why my hon. Friend the Member for Oldham, West (Mr. Meacher) referred the House to Labour's programme and the alternatives contained therein. We have responsibilities tonight. We must not forget that the failed policies of the Tory Government have created the worst unemployment and the deepest industrial recession since the 1930s. The Government will also proclaim their achievement in reducing the rate of inflation, but we must point to the heavy cost in lost employment and output.

We must argue that deflating the economy, depressing manufacturing output and throwing workers on the dole are not, and never can be, acceptable strategies for countering inflation. We must warn that, when the present very low level of world commodity prices begins to recover, inflation will inevitably take off again.

When the Government try to shift the blame for the present slump on to the worldwide recession, which is affecting every country, we must stress that the slump in Britain has been, and still is, dramatically worse than elsewhere. In terms of output, industrial production, investment, loss competitiveness and unemployment, our record since 1979 has been markedly worse than those of our major industrial competitors. The Government have contrived to achieve this state of affairs despite the advantage of self-sufficiency in oil since 1980. The Conservative party always claims that everything will be better tomorrow. It is always "tomorrow". The Chancellor of the Exchequer said so in 1980. The Prime Minister said it in 1981 and the Financial Secretary said it in 1982. Conservative Members will be queueing up throughout 1983—right up to the election—to remind us that it will get better tomorrow.

We must ensure that the British people are shown the real facts that lie hidden behind these Tory fantasies, such as those revealed in last month's seasonally adjusted and manipulated unemployment figures. They show that for the 48th month in a row the number of people out of work in Thatcher's Britain has gone up to a post-war record of well over 3 million. It is on facts such as those, which reveal the Conservative party's mismanagement of the economy, that the Government must be judged.

Like other hon. Members, I want to take the debate back to the real people of Britain, who are suffering from the effects of the Government's economic policy. Dundee has paid an enormous price for that disastrous policy. The announcement of 400 redundancies at Veeder-Root in November 1982, the shedding of 38 jobs at Holo Krome and the unemployment figures announced at the time, meant that unemployment then stood at 16,000. It has risen significantly since then.

Those figures represent a 112 per cent. increase since the Conservative party came to power in 1979. Since January 1982, seven Dundee firms have gone to the wall, and there have been a further 25 redundancies in other companies. A total of 42 per cent. of men registered as unemployed have been out of work for more than a year. More than 1,000 are in "one step away from the dole" jobs—those are supported by job protection schemes. In Dundee, 20,000 people are claiming supplementary benefit, and more than 1,250 young people registered as unemployed have never had a job since leaving school.

The number of engineering apprenticeships has dropped from 134 in 1978ߝ79 to 61 in September 1982. In November, when there were 452 redundancies in the Dundee engineering industry, there were only eight vacancies over which those people could scramble to find a job. These gloomy figures reveal the disastrous extent to which the Government's economic policies have hit Dundee.

The textile industry was a major employer in Dundee. In 1977, it employed 7,500 people. In 1982, the number had fallen to 2,000. There has been a loss of 5,000 jobs with no vacancies. That industry had a docile work force that accepted closures, redundancies and short-time working allied to relatively low wages—all that the Prime Minister said they should do if they wanted to preserve employment. Instead, those people have lost their livelihoods and dignity because of the Government's failure to deal with cheap imports from Bangladesh and India and, more particularly, market saturation from the EC, especially Belgium. When a group of hon. Members met the Minister responsible for industry at the Scottish Office, all he could offer was platitudes. He could not even offer a retraining programme for those people.

The most serious threat now facing Dundee affects the new technologies, even though the Government have said that we should all be concerned with their viability and success. Nimslo has recently announced that it intends to move the production of its 3D camera from Timex in Dundee to Japan. Despite the fact that that camera was developed as a result of the skills, expertise and experience of the Dundee work force, Nimslo has decided not to take advantage of the Government grants it was offered, has abused the Timex work force and has moved production to Japan.

The company claims that it can produce it much cheaper in Japan. One of the reasons why it can argue that is that the Nimslo company did not take advantage of the investment that was offered. The Timex company failed to invest in the new plant and machinery that would allow those engineering workers, tool makers and assembly workers who had produced the camera in less than two years to take advantage of their hard work.

The Timex company came to Dundee in 1947 because, as a Timex publication recorded at that time, it found a pool of intelligent and readily trained people who adapted to a specialised industry with excellent results. Since then, the Timex company has had a tremendous and magnificent response from its work force. It has had a good industrial relations record. A traditional watchmaking industry is dying because of a lack of investment in plant and machinery that would allow the workers in the company to compete with their French counterparts in the use of new technologies.

That is best expressed by the words of Mr. Jim Tinney, the chairman of the staff section of the AUEW at Timex. He said:
"With no research and development facilities at Timex, new products only appeared on the production line as a direct result of union pressure."
He refers also to Veeder-Root:
"Veeder-Root lost out because of being unable to carry out research and development locally into electronic digital counters for petrol pump heads."
Dundee is being denied research and development facilities which means inevitably that it is dependent upon the dictates of the parent company. We shall gain nothing from being able to solder microchips if the technology to produce them and the knowledge to design them remain in the United States.

Those workers need assistance. They are putting together a package that they will present to the Scottish Office with, I imagine, little hope of any substantial financial assistance. That contrasts with the way in which the Mitterrand Government in France responded to the needs of the Timex workers at the Besancon plant. The Mitterrand Government were prepared to hand over £90 million to ensure that the Besancon plant could be modernised to take advantage of the technology that Timex wished to site there. If Jim Tinney's hopes are to be realised, a radically different economic approach requiring large scale public support is needed for the microelectronic industry in Dundee and for the application of new technologies throughout the industry.

Specific measures for new technology must be backed by an increased rate of growth in the economy. That can be achieved only by a reflation of demand based on an increase in public spending, tax cuts for the low paid, a policy of full employment, the revitalisation of our manufacturing base and the control of import penetration by foreign manufactured goods. Priority must be given also to the level of effective demand in the economy to catch the increased productivity potential.

There must also be a place in this equation for the trade union movement. During their three years in office the Government have made a point of denying the valuable role that is to be played by trade unions, particularly in the development of new technology. The trade union movement has a vital and central role to play in the introduction of new technology—the speed of its introduction, the way in which it operates upon working conditions, job content and status for employees and, more important, its effect on employment. That is clearly demonstrated by Timex in Dundee.

At Blackpool last year, whatever else happened, the Labour party adopted a series of policies that offer the people of Great Britain relevant Socialist answers to the many problems that beset them in a capitalist system in deep crisis. They are policies which offer the hope of rebuilding our industrial base, reconquering our domestic markets and restoring Great Britain to full employment. They are policies that aim at developing our social services, making major improvements in social benefits and eliminating poverty. They are policies that defend the rights and interests of ordinary workers, control rents, prices and fares. They will allow workers to organise freely in trade unions in defence of wages and conditions. They are policies that will bring into, or back into social ownership, those assets that are vital to the creation of an efficient and democratic industrial structure.

"Labour's Programme '82" gives a detailed account of all our party's policies. They offer the prospect of a fairer, more prosperous and Socialist Britain. They are the only hope that the Timex workers can look to in 1983.

8.49 pm

I have the honour to be a Member of the Parliament in Strasbourg where pressure on the timetable is often so severe that even party leaders have to confine their remarks to four or five minutes. I have more than once been confined by the Chair to 90 seconds. To be able to speak for 10 minutes is British plenty.

I wish to comment on the speech of the right hon. Member for Stepney and Poplar (Mr. Shore) who made a strong attack on the Government's exchange rate policy. It struck me, as someone coming to the House of Commons from a business background, as rather academic. But the right hon. Gentleman drew attention to the fact that the Government have an element of choice in their exchange rate policy if they wish to exercise it.

When the oil revenues began to flow in, the Bank of England must have recognised that there was a choice of policies possible—either to let London remain a high interest-rate financial centre, which would result in attracting capital to London, create a high value pound and give us the benefit of cheap imports but at the same time bring pressure on the internal price level; or to contrive that London should be a low interest-rate centre. The Bank of England has a certain element of discretion. It is not true to say that it does not. That would have given us a low exchange rate for the pound, provided a stimulus to exports and, of course, promoted investment within the British economy. It was a difficult choice to make.

I do not believe that in 1980 and 1981 Britain was fully in a position to seize the opportunities that would have arisen had we had the benefit of a low rate of interest and a low exchange rate for the pound. I do not believe industry was ready to reinvest and modernise on the necessary scale. I am afraid that much of the investment that would have taken place would have gone into the purchase of existing assets, which is purely inflationary. Equally, I do not think that the unions were in the mood to allow the sort of economic revival which ought to have followed from a low interest rate and a low exchange rate for the pound. I do not know whether they would even now.

At all events, the Government chose a policy of industrial reorganisation, trade union law reform and stable internal prices. In those policies they have achieved remarkable successes. Industry is much more competitive than it was and the work force is far more aware of the need to innovate and to cut the costs of production. The British economy is far fitter now and much more ready for a revival; but confidence is lacking all round the world.

The question therefore for the Government is how to help to create conditions in which business confidence will revive internationally. Britain is part of the world economy and cannot live simply for itself. I am certain that any business man will say that the Government can do nothing to help international business confidence by jiggering the exchange rate for the pound.

Since the breakdown of the Smithsonian settlement in 1973 and 1974 we have been suffering exactly the same problems as the world experienced after the breakdown of the gold standard in 1931. I shall not draw up a list of all those problems, but the economic patterns of the 1930s and of the late 1970s and 1980s are very similar. We know what to do to solve our problems. The question is whether we have the will.

We know that we ended the economic depression last time by setting up an international structure of exchange rates and stable financial conditions—the Bretton Woods agreement. Last year I had the privilege, as a member of the European Parliament's Economic and Monetary Affairs Committee, to be invited to attend the International Monetary Fund meetings in Toronto. I have been to these meetings on a number of occasions. This time the only spokesman who managed to fill the hall and arouse enthusiasm was Mr. Muldoon. It was known in advance that he was to make a call for the restitution of the Bretton Woods system. I listened to his speech but I do not think it was realistic.

At the end of the war, in 1944ߝ45, the Americans were in a position to establish a world monetary order. Now they are suffering from what one might call aid fatigue; they are preoccupied with their internal problems of inflation, budget imbalance and so on. But that does not mean that we cannot make progress in reaching an international agreement which would assist business confidence.

The structure of the SDR is 50 per cent. the United States dollar, about 12 per cent. the yen and the remaining 38 per cent. or thereabouts the three major European currencies, the pound, the deutschmark and the French franc. Our membership of the European Community thus enables us to do a great deal towards the restoration of international business confidence. We ought to be setting out to organise our own time zone, as I might call it, by working more closely with Paris and Frankfurt.

Above all, we must avoid what one might call a return to national socialism, which was advocated by the right hon. Member for Stepney and Poplar—protectionism, bureaucratic intervention, controls, quotas, five-year plans and the rest. National socialism did Germany no good. Even at its height, Schecht had to recognise that Germany had to live by its exports. He tried to give German industry a prominent place in the export market. The retaliation that would inevitably follow if we adopted the recommendations of the right hon. Gentleman would be disastrous for Britain's place in the world community. We have to make the most of our practical opportunities.

In regard to sterling and the European monetary system, I do not think that we should simply announce that we will join it from one day to the next. Sterling is so freely traded in such large volumes all over the world that if the Bank of England was committed to intervene at a fixed rate, whatever the pressure of selling or buying, it would be a matter of weeks only before we had to leave the monetary system once again. We should not join the EMS without adequate preparation. However, there is a time—and it has come—for us to open negotiations to join the European monetary system under certain conditions. We should take the 6 per cent. margin which the Italians have. Also, it must be understood that we will move the central parity for sterling in accordance with the market's assessment of the relative value of the national currencies in the European monetary system.

It is fruitless to exert pressure on national economies through over-valuation, which is the custom that has grown up within the European monetary system as it is at present being operated. To avoid variations in exchange rates there must be real convergence of the underlying economies, not just a persistence of fixed, false, numerical currency relationships which get overthrown sooner or later by market forces.

The central rates for the European currencies should be adapted regularly, perhaps monthly, to reflect the purchasing power parities so far as we are able to assess them. Then I should like to see a truly European market for capital. At the moment it is only possible to establish a truly free capital market between London and Frankfurt, but in due course Amsterdam would come in; and I think Zurich would come in although strictly outside the European Community. Gradually a single real rate of interest for the Common Market would emerge instead of an artificial structure of fixed exchange rates which convinces no one. Unity of business conditions is far more important than an apparent unity of fixed currency exchange rates in which no one believes.

There should be some stimulus to large-scale investment through the Ortoli facility, which fortunately has just been renewed. I should like to see deliberate progress towards the ending of the tax frontiers which still serve to Balkanise Western Europe because the various member states operate such different rules. European industry is wrongly structured to face the challenge from the Far East. Unless we work together and think in terms of international investment within the Common Market, we shall be the world's unemployment pocket in the next 20 years.

We need also to improve as far as possible our relationship with the world's other currency areas. I believe myself to be reliably informed on the attitude of Japanese bankers, including the central bank. They are saying that they would prefer to see the world resisting Japanese goods because they are too dear rather than because they are too cheap. I believe that the Japanese authorities would welcome a rise in the exchange rate for the yen.

The most that we can ask of the United States is that there should not be such violent interest rate movements and that a more permanent structure should be established between the European exchange rate system and the dollar. But now that my right hon. and learned Friend the Chancellor is in a leading position in the IMF, I am sure that where that institution is concerned a large new loan must be established to fund the OPEC surpluses. The best way to raise it would be on the basis of an indexed rate. I should like to say more, but time will not allow.

9 pm

The debate has been distinguished by many able speeches, although I am bound to say that few right hon. and hon. Members surprised the House with the nature of their views. The only exception was perhaps the right hon. Member for Down, South (Mr. Powell) who surprises us so frequently that we cease to be surprised. For me, there is an element of nostalgia, to which the Chancellor referred, in this debate. It is some time since he and I confronted one another across the Dispatch Box. We are both older now than we were. I must say that, on this occasion, I feel a little more as if I was being nibbled by a hearth rug.

In view of the heavy fall in sterling in the last 10 weeks, I think I should start by considering the relationship between exchange rates, interest rates and the main propositions of the theory by which the Government's economic policy has been guided over the last three and a half years. No one, I think, would feel that I was being unfair if I stated that the Government's policy has been based on three propositions—first, that there is no rational objective that a Government can set themselves in governing the economy, except to control the level of inflation; secondly, that this can be done only by controlling the growth of the money supply; and, thirdly, that the money supply can be controlled only by raising or lowering interest rates. These three propositions form the trinity of what I have come to call sado-monetarism.

In the course of my exegesis, I wish to try to answer the questions that so bewildered the Prime Minister in her seminal interview with Mr. Brian Walden on Sunday. She said that what ultimately determined the value of sterling was the policies that the Government pursued steadily and consistently. She added:
"We may go through a period of rocking"—
I am not sure what she meant by that, but it certainly was not rolling—
"but if we keep our policies firm and do all the right things, you know, keep public spending under control, keep the Budget deficit low and, keep public borrowing down, keep the money supply under control, these are the things that will tell, and the boat will come through surely and steadily, and sterling will stay firm".
The right hon. Lady made it clear on Sunday, as she has done frequently over the last three and a half years, that it is the magic of the market place responding to this resolute approach by this Government which will achieve the desired objectives. She has, however, found the market place just a trifle disappointing in the last few weeks. When she arrived back in London from her visit to the Falklands she joined Queen Victoria in her regal pantheon by saying "We are not impressed by the behaviour of the markets". She was a little more direct when she addressed the Tory trade unionists on Saturday and referred to
"the fickle fears of those who should know better".
That is the Maggie that we know and love.

One thing that has always struck me is that those who rely most on the market place to achieve their objectives are those who understand least how the market place works. I shall deal with the Prime Minister's puzzlement when she said that part of the realignment against the deutschmark and the yen was reasonable because their industrial performance has been much better than ours for a long time but that, for reasons which were utterly inexplicable to her, their currency was performing weakly for a while. I should like to take this opportunity to try to disperse her bewilderment and explain what I and most people in the markets agree happened.

For most of the past three years, interest rates have been determining exchange rates and the markets have been rewarding economic and monetary vice, not economic and monetary virtue. Countries with poor industrial performance, high inflation and inadequate monetary control have seen their currencies rise. Countries with good economic performance, low inflation and good monetary control have seen their currencies fall. For the first two years of the European monetary system, for example, the French franc was at the top of the basket and the German deutschmark was at the bottom, not in spite of the fact that French inflation was higher but because of it. I suspect that the reason for that is as follows.

Since the world stagflation of the 1970s, those who manage the atomic cloud of footloose funds in the Euro markets have lost confidence in any long-term investment of those funds and been interested mainly, but not exclusively, in making short-term gains by exploiting interest rate differentials between one country and another. Therefore, billions of dollars have been moving hour by hour across the exchanges, following even marginal differences in short-term interest rates.

Countries which have given absolute priority to controlling the money supply through interest rates have consequently witnessed their currencies rise whenever they publish bad monetary figures. That has been a regular phenomenon in both New York and London. It happened to the dollar a few days ago in New York. That has been the principal consequence of high interest rates in the countries that have adopted sado-monetarism, but the main purpose of high interest rates was never achieved. High interest rates did not succeed in controlling the money supply. The Chancellor will recall, although he may not wish to do so, that, for his first two and a half years as Chancellor, we had uniquely high interest rates, yet the money supply was completely out of control. It was rising at two or more times the rate that he planned for it each year.

Those high interest rates crucified British industry by raising not only the cost of investment and research and development, but the price of the goods that it exported. Therefore, British industry, like American industry recently, has been subjected to a double squeeze. That is very unfair, because Government theology has taught Ministers to believe that precisely the opposite will be the result.

Four days ago the Chief Secretary to the Treasury said that the way to reduce interest rates is to reduce the public sector deficit. But what happened? We have had the strictest fiscal policy of any major country in the industrial world—the OECD has said so and it was described in detail in a recent paper by a broker in London—but interest rates have been falling more slowly than in Japan, for example, which has had twice the public sector deficit. Despite the fiscal misery to which the Government have subjected us, our interest rates, as the Chancellor had to admit today, are now higher in real terms than they were three years ago, and 4 per cent. higher in nominal terms than interest rates in New York. After three years of crippling interest rates and an over-tight fiscal policy, it is only now that the Government have the growth of M3 down to the average level to which it rose during the five years of Labour Government.

Although money supply rose at more than twice the rate set for it by the Government two years ago, rather than having much higher inflation—which is what the Government told us to expect—inflation came down. That is another puzzle for the Prime Minister. But, of course, everyone knows that inflation has fallen partly because of the depth of the recession—there is no inflation in a cemetery—and partly because of a grossly over-valued exchange rate that reduced the cost of our imports. That is another puzzle for the Government and those who believe in sado-monetarism.

Why is the exchange rate now falling? It is because the markets appear to be changing the priority that they give to interest rates compared with current account performance. There is a great deal of evidence in many countries that current account performance is becoming, as it used to be, the major factor in determining the value of the exchange rate.

The Government told the markets last autumn that they expected the massive balance of payments surplus that they were expecting in 1982 to disappear altogether in 1983. Since giving that prediction, there has been a softening in the price of oil, with the risk of a collapse. I am sure the Government know that if the OPEC price falls this weekend as a result of the meeting of OPEC Ministers, all the pressures on sterling will begin again.

Until recently, and, even now, they do so occasionally, the Government claimed that they could not control the exchange rate. However, as I have demonstrated, by raising interest rates they did push up the exchange rate. It is interesting that when the exchange rate fell below the level that the Government had privately set for it, they panicked. There were two increases in interest rates within a month and massive expenditure of reserves through intervention by the Bank of England—both actions that were wholly incompatible with the Government's theory.

This afternoon the Chancellor tried to get out of it by saying that he raised interest rates to protect monetary policy. Oddly enough, that was done at the first moment since he took office as Chancellor that monetary policy was under control. It is not surprising that the guru of monetarism, that intelligent man Mr. Gordon Pepper—I always feel that one should take more salt with the pepper—wrote in the January issue of Greenwell's Monetary Bulletin:
"In the foreign exchange market, the authorities' tentative interventions have brought them the worst of both worlds and have prolonged the period of sterling's adjustment to its previous over valuation.
In domestic markets, too, the authorities have not been decisive."
So much for the resolute approach.

The Government do not know—I am trying to think of the anatomical phrase to best describe their position—by what rules they should operate. They have no policy. They find themselves in the economic area in much the same position as Lord Carrington found himself some 18 months ago, when he had no policy to deal with the Falklands dispute except to go on talking—and, my God, the Tories do go on talking.

The Chancellor reminds me of a driver who was stopped by a patrol car on a motorway. The policeman said "You are drunk". The driver said "Thank God, I thought the steering had gone". I predicted a long time ago that the Prime Minister would do for monetarism what the Boston Strangler did for door-to-door salesmen. She has, of course, succeeded. The memorial to her policy is visible to us all. The price of her experiment—as the Bank for International Settlements described it—is record unemployment, a record level of bankruptcies, the lowest manufacturing output for 17 years and the biggest fall in national output suffered by any industrial country in the past three years. Ironically, those who have suffered most from her policies are those whom she promised most to help. The entrepreneurs in private industry were, as the House will recall, to be galvanised by this Government. Boy, were they galvanised! The right hon. Lady has strapped them down in the electric chair and pulled the switch.

In her interview with Mr. Walden on Sunday, the Prime Minister took credit for the wonderful things that she was to do for new industries and innovation. What are the facts? A CBI survey published in the newspapers this morning shows that research and development expenditure, the key to all innovation, had been on average absolutely flat for the past four years. The only industries in which it has increased are electronics and chemicals, but even there it has increased at only half the rate of the previous four years.

There is an epitaph for this policy, whose author is very close to the Government's heart. Its author is the Morgan Guaranty bank—the British Government's bank in New York and the only New York bank which still has a triple A rating. A current issue of the bank's bulletin is entirely devoted to the lessons of Thatcherism. As I might be regarded as prejudiced if I made my own summary, I shall quote the summary in the Daily Telegraph business section.

Does the right hon. Gentleman have a copy?

I have it here, and I shall quote from it:

"Morgan believes Britain has suffered from an overvalued pound which, in turn, was the by-product of Mrs. Thatcher's determined monetarism combined with unrestrained pay rises during the early part of her Government. Morgan calculates that in terms of relative costs of production, the pound was 58 p.c. overvalued in 1981 and 34 p.c. overvalued during most of last year.
Even after the 10 p.c. fall in the value of the pound in the last six weeks of 1982, Morgan calculates that the pound was 20 p.c. too expensive at the beginning of this year, which could explain why it continues to falter on foreign exchange markets."
Morgan Guaranty devoted a whole issue of its bulletin to the Thatcherite experiment to point out the lessons for the United States, where Reaganomics is facing an even greater failure—mainly although not wholly for the same reasons—than Thatcherism.

That brings me to the other main theme of the debate—the crisis in the world economy and the accompanying crisis in the world's banking system which, despite the Prime Minister's new placeman at the Bank of England, is still very much with us. Even as late as September, on the eve of the IMF jamboree in Toronto when I, like the right hon. Member for Sidcup (Mr. Heath), had been raising the problem for three years, I was told by the good and the great, and certainly by the Government, that it was absolute nonsense and there was nothing whatever in it. The only step that the Chancellor took was to bring forward the IMF discussion that should have taken place in 12 months' time to next Easter. Now, thank goodness, he knows that there is a problem and has brought the discussion forward to February. We greatly welcome his belated recognition that there is a problem. It is a great pity that he did not recognise it when the rest of us did and took action before it became as grave as it now is.

I very much welcome the decision to double the resources of the IMF. That is now under way. How could I fail to welcome it, having asked for it for so long? But many other steps must be taken by way of first aid to the world's banking system in the next few weeks. Central banks must be given more influence over commercial banks in their countries and the Bank for International Settlements must have more knowledge and influence in what the central banks are up to. A big increase in the resources in the World Bank is also needed.

All that, however, is merely first aid for a banking system that is hourly threatened by collapse. As is daily more widely recognised throughout the world, there is no chance of saving the international financial system without a change of economic policy in the main industrial countries. The less developed countries that do not have their own oil—Mexico, incidentally, is not one of them, but despite its oil it is still in trouble—have seen the cost of servicing their debt rocket up due to excessive interest rates in the developed world, and their ability to service their debt cut colossally because, as a result of the world recession, commodity prices are the lowest for 30 years. The risk is that if we avoid an early banking collapse it will be at the expense of a contraction in bank lending to the non-oil developing countries, which would drive them into mass starvation and revolution and would probably lead before long to widespread default as well.

The greatest worry for most of us, certainly in the Opposition, is that the problems now facing the world economy are due primarily to the extent to which other Governments are following the lead set by the British Government. The Chancellor boasted of that just a few moments ago. Yet the next voice that one hears is invariably that of the Prime Minister or the Chancellor saying that our problems are massively increased by the fact that there is a world recession. It is like the leader of the Gadarene swine complaining when he falls from the cliff that the other swine are falling on top of him.

There is now increasing recognition even among Governments that there is no hope of saving the economic system of the Western world from collapse without a collective strategy for growth. The French Government have been preaching that for many months and now, to our immense surprise as well as relief, so are American Treasury Secretary Regan, American Secretary of State George Shultz, who has such massive influence in this area now that he is in Washington, and, above all, Mr. Beryl Sprinkel—until now the most rigid and doctrinaire of all monetarists anywhere in the world. Last weekend, according to the newspapers, Mr. Sprinkel actually tried to get the locomotive out of the shed again. He said that countries that have brought down inflation should take the lead in pulling the world out of recession by increasing demand and he named his own country, Britain, Germany and Japan. We all agree 1,000 per cent. with what he said, but the Chancellor turned him down flat and the refusal of the Group of Ten to accept that advice yesterday cancels out most of the value of the improvements in first aid to the IMF through the increase in the GAB and the coming increase in quotas.

The lesson that has been learnt not only in Britain but in many other countries from the bitter experience of the past few years is that economic growth cannot be achieved without consensus at home and co-operation abroad. The tragedy of our country is that both consensus and co-operation are totally alien to the character of our Prime Minister. In that chilling interview on Sunday when the icy glitter of her eyes not once was softened by a glimmer of compassion for the victims of her rigidity, she pledged herself to those values of Victorian society which the leaders of the Conservative party in those days such as Lord Shaftesbury and Benjamin Disraeli fought the whole of their political careers to change—the values of the poorhouse.

The Prime Minister and the Secretary of State for Employment are the Gradgrind and Bounderby of modern Britain, and they glory in it. Most frightening of all in that interview by the Prime Minister was what she said about consensus. She said:
"There would have been no great prophets, no great philosophers in life, no great things to follow, if those who propounded the views had gone out and said 'Brothers, follow me, I believe in consensus.'" No Brian, no.'
Jesus Christ was a great prophet. People followed him because he believed in brotherhood, equality and consensus—all the values that the Government reject. Even if I reduce the argument to the level of economics, nobody on the Government Front Bench can deny that the key to the success of the Japanese economy is consensus, which is institutionalised in the whole of Japanese society.

There is no hope for the world unless its Governments can get together, sink their differences and compromise for the sake of collective action. This is as true in economic affairs as it is in political affairs and in defence and disarmament affairs. We believe that there is no hope of a search for that consensus or co-operation under this Government. That is why we ask the House to support our amendment tonight.

9.27 pm

When I think of the vicissitudes in the career of the right hon. Member for Leeds, East (Mr. Healey), when I look at the panoply of divided talents on the Labour Benches and consider some of the things that have been said by right hon. Gentlemen about one another, the one thing that I am not prepared to do is to listen to lectures from the right hon. Gentleman about consensus. I cannot think of anyone less qualified to talk about it.

Until the right hon. Gentleman's pious last few words, we had witnessed today a rather unusual debate on economic policy. The international scene has been concentrated on to a much greater extent than in most of our debates. We have heard speeches from some of the most distinguished and experienced Members of the House on international issues—my right hon. Friends the Members for Sidcup (Mr. Heath) and for Taunton (Mr. du Cann), and my right hon. and learned Friend the Member for Hexham (Mr. Rippon) and the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), to name but a few.

It is right that a wider scene should be set even when we are debating our domestic financial controversies. The anxieties that have been expressed about the international scene are those to which we should give vent.

I hope that those who have contributed to the debate will forgive me if I do not consider in detail every one of the many constructive proposals that have been put forward. However, I assure them that my colleagues and I will wish to consider carefully what has been said.

Three aspects of the international economic scene spring to mind—our policies, the use of institutions and the reform of institutions. The stress that has been laid in the debate on the need for international co-operation is right. However, less than justice has been done to the co-operation at the many international meetings of finance Ministers and others in recent years.

The right hon. Member for Leeds, East is right to say that a consensus, to use his word, has emerged and that that consensus has centred largely on the Government's policies. The communiqué that was issued yesterday at the Group of Ten meeting states:
"In addressing the world economic situation, the Ministers and Governors welcomed recent successes in the fight against inflation and prospects for further progress. They looked towards sound monetary and fiscal policies and appropriate moderation in the growth in incomes to encourage lower interest rates, expanding trade, higher employment and durable economic strength."
The right hon. Gentleman has sought to suggest that the French Government seek to persuade the international community to follow different policies. He has sought to suggest also that prominent voices in the American Administration are calling for different policies. However, the statement which I have quoted was agreed by all members of the Group of Ten, including France and the United States, but yesterday. It was right to do so because in following the policies commended by the communiqué and advocated by the Government, the countries of the Group of Ten are dealing with the problem of inflation and its consequences on a world scale in the same way that we have attempted to deal with the problem on a domestic scale.

The process of adjustment involved in pursuit of the recommendations set out in the communiqué will deal, if followed through, with one of the problems that has been rightly identified by a number of those who have participated in the debate. That is the problem of exchange rate instability. There is no doubt that if policies converge in the direction that the Group of Ten identified and commended, there will be less exchange rate instability. There is equally no doubt that the instability has been damaging. I agree with the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) about that.

I do not agree with the belief that has been expressed in some quarters in the House that what is called for is not world consensus on policies but massive world reflation. It is right that if reflation took place worldwide it might be less immediately catastrophic than if it were unilateral. However, I do not believe that such policies, even worldwide, would deal with the problem. It is precisely the growth of inflation and the extent of borrowing that have led us into the present international difficulties. Therefore, I do not believe that action to bring about world reflation would deal with the problem. However, that does not mean that we can do nothing, should do nothing, have done or will do nothing. The reverse is true. There is considerable scope for the use of institutions and for action. We still have an international financial system.

Although it is tempting, and although there is a case for advocating substantial changes in the world's financial system at such a time as the present, let us not forget that if we are concerned about the immediacy of the problems and the need for urgent action, the use of existing institutions is far more likely to produce quick results than any grandiose scheme for creating new institutions.

My right hon. and learned Friend the Chancellor made it clear today when such institutions were to be used. He referred to a major announcement that was made yesterday—not next week. It is a substantial step forward to obtain from the Group of Ten an agreement to extend the general agreement to borrow from 6·4 billion SDRs to 17 billion SDRs. That is a substantial increase. Right hon. and hon. Members who have spoken have been good enough to accept that that is a substantial step forward.

As long ago as the meeting in Toronto, my right hon. and learned Friend the Chancellor made it clear that he was in favour of another major measure that would assist the world in dealing with international difficulties—the extension of the IMF quotas by at least 50 per cent. He continues to work in that direction in his capacity as chairman of the interim committee of the International Monetary Fund.

There is convergence in the right direction in relation to policies. There is substantial movement in the right direction in the use of financial institutions. However, I readily concede that if we are talking about the reform of institutions or the creation of a new Bretton Woods agreement, we have not taken steps in that direction. To attempt to do that in circumstances that have changed so dramatically and radically since the institutions of the immediate post-war period were set up would not be the best way to cope with the present serious international problems. We should make use of the institutions that we have.

Is my right hon. and learned Friend saying that the Government completely reject the initiative that was taken by the United States Secretary of the Treasury calling for a Bretton Woods type of conference? Of course the circumstances are different. That is why we need such a conference.

There is no agreement between the British Government and the United States Government on these matters. No initiative has been taken by the United States Government that has been rejected by the present Government. I welcome the opportunity to reassure my right hon. and learned Friend on that score. [Interruption.] If he is not reassured yet—as the hon. Member for Blackburn (Mr. Straw) appears anxious to show that he is not—I shall take the opportunity later to continue the process of reassurance.

—to what should be of interest to the hon. Member for Motherwell and Wishaw (Dr. Bray), because the motion was put down by the official Opposition and it deserves at least some attention—

The motion which is the centre of this debate condemns the Government for high interest and exchange rates and blames those for high unemployment. The main part of my remarks should be addressed to the motion.

That is what the motion states, but its real implication is that we should allow inflation to rip. The motion and the arguments in support of it ignore the consequences of a serious and concerted attempt to lower the exchange and interest rates. The central thrust of our policy has been to give primacy to reducing inflation. Only by reducing inflation can we have sustainable growth and a real and lasting reduction in unemployment.

The right hon. Member for Stepney and Poplar (Mr. Shore) was, to put it extremely mildly, grossly unfair to my right hon. Friend the Prime Minister in quoting from her speech, because he tried to present her as heartless and uncaring—[HON. MEMBERS: "Hear, hear."] Hon. Members are entitled to their views, but they are not entitled to hold them on the basis of a distortion of what my right hon. Friend said. The right hon. Gentleman complained that my right hon. Friend the Prime Minister said in her speech at St. Lawrence Jewry that inflation was an evil and that unemployment was a problem. The right hon. Gentleman hung much of his speech on the heartlessness aspect, about which we have heard much.

However, the right hon. Gentleman did not quote the statement of my right hon. Friend—I am reading from the same speech, not too far away from the passage relied upon by the right hon. Gentleman—that
"I cannot conceal that of all the difficulties that I face unemployment concerns me most of all."
[HON. MEMBERS: "Hear, hear".] So much for the standard of fairness that the right hon. Gentleman brings to the consideration of such matters.

The reason for pursuing inflation as the primary objective is precisely because the curbing of inflation is a necessary condition for dealing with unemployment and because today's unemployment is largely the product of yesterday's inflation. An attempt to tackle unemployment directly by a process of reflation would very shortly be counterproductive. It does not lie in the mouths of Opposition Members to make accusations of heartlessness and lack of care about a Government who have followed sound financial policies and who have, within those policies, so ordered their priorities and expenditure as to introduce a massive youth training scheme, a job release scheme, job splitting and the young workers' scheme. Even within sound fiscal policies, primacy is given to assisting those who are unemployed through no fault of their own. [HON. MEMBERS: "It is your fault."] Right hon. and hon. Members might accept, in considering inflation and the implication of our policies on interest and exchange rates, that inflation does not fall by magic. It is a tough business and there are no easy alternatives. The policies criticised by Opposition Members were, and are, to reduce inflation and to keep it down. Unless that is done, there are no prospects for employment, however much the hon. Member for Blackburn may seek them.

We could have tried to engineer a lower exchange rate and lower interest rates by throwing fiscal and financial prudence to the wind, although in today's world it is very doubtful whether we should have succeeded in achieving lower exchange and interest rates had we embarked on that attempt. Had we embarked on it, it would have meant abandoning the policies needed to fight inflation. That is not a price that we were or are prepared to pay. To have paid it would not have brought about sustainable growth and a real improvement in employment prospects—quite the reverse.

It has been charged that the exchange rate was and may still be overvalued. What does that mean? The effective exchange rate now is lower than it was when we took office. What Opposition Members mean is that it has not fallen enough to offset the rise in our domestic costs, which was, until recently, way in excess of that experienced in other major countries.

Why has that been the cause? Part of the reason lies in the external events in the rest of the world and in the oil market, but the major reason has been that financial markets have believed that we mean business on inflation, while other markets, such as the labour market, have taken longer to adjust. Wages went on rising rapidly in 1979ߝ80, with the result that competitiveness deteriorated. That put severe pressure on industry, but it helped to speed the fall in inflation by spurring firms to be more efficient, by encouraging greater realism in pay bargaining and by holding down import costs.

The initial rise in the exchange rate was the inevitable consequence of the policies designed to reduce inflation. Of course, it would have been much less painful if the increases in domestic costs had come down earlier and faster than they did. They are now coming down and our competitiveness is improving. Unit labour costs grew by 5½ per cent. last year—a rate below that of most of our major competitors. A policy designed to hold down the value of sterling and interest rates artificially would have undermined the attempt to reduce inflation and given a direct boost to domestic costs. It would have involved massive intervention in the foreign exchange markets or accelerating monetary growth.

The right hon. and learned Gentleman has told the House how, in his view, the country came to be so uncompetitive, and to lose its competitiveness during the first two years of Conservative Government. Will he now answer the question put to him by virtually every hon. Member who has spoken today, and say whether he believes that the depreciation of sterling by about 12 per cent. in the past two months is a help to the restoration of our competitiveness? Does he agree with that, and does he look upon that as a substantial contribution to restoring that lost competitiveness—yes or no?

It is not possible or desirable for Governments to bring down the exchange rate to increase competitiveness. [Interruption.] The right hon. Gentleman asked me a question and must wait for the answer. If he does not want to hear the answer, he should not ask the question.

It is right that in the short term it is easier for British industry to export than it was before this occurred. However, as I have made clear, I do not believe that, in any permanent sense, a fall in the exchange rate helps. Between 1972 and 1975, the exchange rate fell by 20 per cent., but competitiveness was no better in 1975 than it had been in 1972. There was a short-term boost and a short-term benefit that was soon dissipated in increased costs.

Even if forcing the exchange rate down made sense, I should seriously ask the question, would it have been possible? Success in manipulating the exchange rate in the face of strong market pressures either way is by no means something that can be guaranteed, as the right hon. Member for Leeds, East should understand. In 1977, he tried to prevent an appreciation of sterling. Intervention was massive. The right hon. Gentleman could not have done more if he had tried. Interest rates were cut from 14½ per cent. to 5 per cent. However, the attempt failed and had to be abandoned. The effect was a monetary explosion with M1 growing by 25 per cent.

There are costs and benefits from every major change in policy. [HON. MEMBERS: "Oh".] Bless my soul. If that is a surprise to Conservative Members, they have been living in a very sheltered environment in the past few years. Of course there are costs and benefits. Having weighed them up and knowing, as my right hon. Friend the Member for Leeds, East (Mr. Healey) recently explained, that exchange rates are responsive to interest rates, on balance does the right hon. Gentleman wish to keep the present level of the exchange rate or is it his Government's policy to use interest rates to drive it back up again? Let us have an answer.

I have answered that question; the right hon. Gentleman knows that perfectly well. I said that I do not believe that it is right for Governments to attempt to force the exchange rate up or down to a substantial extent. In answer to the question that the right hon. Gentleman was so anxious to have answered, I said candidly and honestly that there were certain benefits to be got from what has occurred, and certain disadvantages. In his most recent intervention the right hon. Gentleman has been good enough to concede that there is a balance in these matters. That is exactly what I have said. It will not be surprising to him if I choose to place the balance somewhat differently from where he places it.

In his motion the right hon. Gentleman goes on to deal with interest rates. They also play a vital role in securing monetary conditions that will bring down inflation. The policy of monetary restraint is bound to involve in the first phase high interest rates. That is why interest rates have been high all round the world. However, as monetary policy has its effect, so inflation comes down and interest rates with it. During 1980 interest rates reached about 16½ per cent., but they now stand at 11 per cent.

However, it is absolutely essential to appreciate that in such a complex process it can never be an absolutely smooth linear progression. In the summer of 1981 interest rates fell to 12 per cent., but rose sharply in the autumn. As my right hon. Friend the Prime Minister said in her interview, and as my right hon. and learned Friend the Chancellor of the Exchequer said today, because the central thrust of our policy was right and clear, we were able to overcome that setback. We were following a responsible fiscal policy and cutting back on our borrowing requirement. We were not borrowing more and spending more, as the right hon. Gentleman advocates.

The result was that by November 1982 interest rates were down to 9 per cent. Since then—

The hon. Gentleman is perceptive to observe last week's events, as he always is. Since then, of course, there has been a setback that has triggered off the debate. However, as before, getting the fundamentals right will enable us to continue the downward trend in time.

However, getting interest rates down has implications for fiscal policy, to which the right hon. Gentleman pays no heed. If one wants to avoid putting undue upward pressure on interest rates, it is necessary to limit the level of borrowing. It is dangerous nonsense to suppose, as does the right hon. Gentleman in his package, that the Government can decree that interest rates should be X per cent. lower and at the same time massively increase the Budget deficit and still hope to restrain inflation. Those were the financial policies of the late King Canute. They would be no more successful if followed in this country today than they were at that time.

However, the Opposition have a single, simple answer to the problems. One way to square the circle—the way put forward by the right hon. Gentleman in his meretricious programme—is to restore exchange controls. It seems strange to me that the reintroduction of that which had already become an anachronism when it was abolished should be regarded as any kind of solution to the problems of the 1980s.

Exchange controls were introduced at the beginning of the war to make gold and foreign currency available for the war effort. The huge growth in trade flows and international capital markets since the 1960s made them increasingly ineffective. The move to floating exchange rates and the effect of North Sea oil on our balance of payments made them quite irrelevant.

The exchange control component was an important part of the right hon. Gentleman's package. I am sure he would want me to do justice to it.

The right hon. Gentleman has had three bites of the cherry. He must allow me to explain why exchange controls would be quite useless as any sort of economic bulwark to prevent the natural consequences of his foolish policies. Today there are potentially vast movements of non-resident funds, which are quite outside our control. The introduction of exchange control would do nothing whatsoever to affect such movements.

Exchange control, if introduced, would not control the leads and lags on trade payment. In case that sounds a technical explanation of a phenomenon, I remind the right hon. Gentleman of the impact that can have on the flows. One month's movement could mean a shift across the exchanges of £10 billion. The experiences of the Opposition in 1967 and 1976 took place when the full panoply of exchange control was in operation. Not one official left the Bank of England and not one step had been taken to dismantle those controls. They would do nothing at all to give protection to that Government and their economic policies. The market had lost confidence in the then Government and that was reflected in the exchange rates.

With today's communications and sophisticated markets, no control regime can for long prevent movements of funds in and out of a major international currency such as sterling. When we abolished exchange controls in 1979, we removed a bureaucracy of 750 people in the public sector and an administrative burden on industry that had become ineffective and without purpose. The last prop of the right hon. Gentleman's policy collapses. It is apparently impossible to square the circle.

The exchange rate and interest rate policies that the right hon. Gentleman is calling upon us to follow would inexorably lead to inflation. The exchange control route that he seeks to present as an alibi and excuse would get him nowhere.

The final prop of the programme upon which the simulation depends disappears, because the right hon. Gentleman would never have the guts to face the trade union movement and ask it for the incomes policy without which his entire programme is a tissue of rubbish.

The right hon. Member for Stepney and Poplar has had cold feet recently. He does not like the reference to the 30 per cent. devaluation. It is only an illustration—a simulation. The same can be said of the projected increase in output and employment that he put forward. That, too, is no more than an illustration which does not show up in real life.

I therefore commend the amendment to the House and ask hon. Members to reject the motion.

Question put, That the original words stand part of the Question:—

The House divided: Ayes 218, Noes 334.

Division No. 46]

[10 pm

AYES

Abse, LeoDalyell, Tam
Adams, AllenDavidson, Arthur
Allaun, FrankDavies, Rt Hon Denzil (L'lli)
Anderson, DonaldDavis, Clinton (Hackney C)
Archer, Rt Hon PeterDavis, Terry (B'ham, Stechf'd)
Ashley, Rt Hon JackDeakins, Eric
Ashton, JoeDean, Joseph (Leeds West)
Atkinson, N. (H'gey,)Dewar, Donald
Barnett, Guy (Greenwich)Dixon, Donald
Benn, Rt Hon TonyDobson, Frank
Bennett, Andrew(St'kp'tN)Dormand, Jack
Booth, Rt Hon AlbertDouglas, Dick
Bottomley, Rt Hon A. (M'b'ro)Dubs, Alfred
Bray, Dr JeremyDunnett, Jack
Brown, Hugh D. (Provan)Dunwoody, Hon Mrs G.
Brown, R. C. (N'castle W)Eastham, Ken
Brown, Ron (E'burgh, Leith)Edwards, R. (W'hampt'n S E)
Buchan, NormanEllis, R. (NE D'bysh're)
Callaghan, Rt Hon J.Ennals, Rt Hon David
Campbell, IanEvans, Ioan (Aberdare)
Campbell-Savours, DaleEvans, John (Newton)
Canavan, DennisFaulds, Andrew
Cant, R. B.Field, Frank
Carter-Jones, LewisFitch, Alan
Clark, Dr David (S Shields)Flannery, Martin
Clarke, Thomas (C'b'dge, A'rie)Foot, Rt Hon Michael
Ford, Ben
Cocks, Rt Hon M. (B'stol S)Forrester, John
Cohen, StanleyFoster, Derek
Concannon, Rt Hon J. D.Foulkes, George
Conlan, BernardFraser, J. (Lamb'th, N'w'd)
Cook, Robin F.Freeson, Rt Hon Reginald
Cowans, HarryGarrett, John (Norwich S)
Cox, T. (W'dsw'th, Toot'g)Garrett, W. E. (Wallsend)
Craigen, J. M. (G'gow, M'hill)George, Bruce
Crowther, StanGolding, John
Cryer, BobGourlay, Harry
Cunningham, Dr J. (W'h'n)Graham, Ted

Hamilton, James (Bothwell)Pendry, Tom
Hamilton, W. W. (C'tral Fife)Powell, Raymond (Ogmore)
Hardy, PeterPrescott, John
Harman, Harriet (Peckham)Price, C. (Lewisham W)
Harrison, Rt Hon WalterRace, Reg
Hattersley, Rt Hon RoyRadice, Giles
Haynes, FrankRees, Rt Hon M (Leeds S)
Healey, Rt Hon DenisRichardson, Jo
Heffer, Eric S.Roberts, Albert (Normanton)
Hogg, N. (E Dunb't'nshire)Roberts, Allan (Bootle)
Holland, S. (L'b'th, Vauxh'll)Roberts, Ernest (Hackney N)
Home Robertson, JohnRoberts, Gwilym (Cannock)
Homewood, WilliamRobertson, George
Hooley, FrankRobinson, G. (Coventry NW)
Howell, Rt Hon D.Rooker, J. W.
Howells, GeraintRoss, Ernest (Dundee West)
Hoyle, DouglasRowlands, Ted
Huckfield, LesRyman, John
Hughes, Mark (Durham)Sever, John
Hughes, Robert (Aberdeen N)Sheerman, Barry
Hughes, Roy (Newport)Sheldon, Rt Hon R.
Janner, Hon GrevilleShore, Rt Hon Peter
Jay, Rt Hon DouglasShort, Mrs Renée
John, BrynmorSilkin, Rt Hon J. (Deptford)
Johnson, James (Hull West)Silkin, Rt Hon S. C. (Dulwich)
Johnson, Walter (Derby S)Silverman, Julius
Jones, Rt Hon Alec (Rh'dda)Skinner, Dennis
Kaufman, Rt Hon GeraldSmith, Rt Hon J. (N Lanark)
Kerr, RussellSnape, Peter
Kilroy-Silk, RobertSoley, Clive
Kinnock, NeilSpearing, Nigel
Lambie, DavidSpellar, John Francis (B'ham)
Lamond, JamesSpriggs, Leslie
Leadbitter, TedStallard, A. W.
Leighton, RonaldStewart, Rt Hon D. (W Isles)
Lewis, Arthur (N'ham NW)Stoddart, David
Lewis, Ron (Carlisle)Stott, Roger
Litherland, RobertStrang, Gavin
Lofthouse, GeoffreyStraw, Jack
Lyon, Alexander (York)Summerskill, Hon Dr Shirley
McCartney, HughTaylor, Mrs Ann (Bolton W)
McDonald, Dr OonaghThomas, Dafydd (Merioneth)
McElhone, Mrs HelenThomas, Dr R. (Carmarthen)
McGuire, Michael (Ince)Thorne, Stan (Preston South)
McKay, Allen (Penistone)Tilley, John
McKelvey, WilliamTinn, James
MacKenzie, Rt Hon GregorTorney, Tom
McNamara, KevinVarley, Rt Hon Eric G.
McWilliam, JohnWainwright, E. (Dearne V)
Marks, KennethWalker, Rt Hon H. (D'caster)
Marshall, D (G'gow S'ton)Wardell, Gareth
Marshall, Dr Edmund (Goole)Watkins, David
Marshall, Jim (Leicester S)Weetch, Ken
Martin, M (G'gow S'burn)Welsh, Michael
Mason, Rt Hon RoyWhite, Frank R.
Maxton, JohnWhite, J. (G'gow Pollok)
Maynard, Miss JoanWhitehead, Phillip
Meacher, MichaelWhitlock, William
Mikardo, IanWigley, Dafydd
Millan, Rt Hon BruceWilley, Rt Hon Frederick
Miller, Dr M. S. (E Kilbride)Williams, Rt Hon A. (S'sea W)
Mitchell, Austin (Grimsby)Wilson, Gordon (Dundee E)
Morris, Rt Hon C. (O'shaw)Wilson, Rt Hon Sir H. (H'ton)
Morris, Rt Hon J. (Aberavon)Wilson, William (C'try SE)
Moyle, Rt Hon RolandWinnick, David
Newens, StanleyWoodall, Alec
Oakes, Rt Hon GordonWoolmer, Kenneth
O'Neill, MartinWright, Sheila
Orme, Rt Hon StanleyYoung, David (Bolton E)
Palmer, Arthur
Park, GeorgeTellers for the Ayes:
Parker, JohnMr. George Morton and
Parry, RobertMr. Lawrence Cunliffe.
Pavitt, Laurie

NOES

Adley, RobertAlton, David
Aitken, JonathanAmery, Rt Hon Julian
Alexander, RichardAncram, Michael
Alison, Rt Hon MichaelArnold, Tom

Aspinwall, JackFaith, Mrs Sheila
Atkins, Rt Hon H. (S'thorne)Farr, John
Atkins, Robert (Preston N)Fenner, Mrs Peggy
Atkinson, David (B'm'th,E)Finsberg, Geoffrey
Baker, Kenneth (St.M'bone)Fisher, Sir Nigel
Baker, Nicholas (N Dorset)Fletcher, A. (Ed'nb'gh N)
Banks, RobertFookes, Miss Janet
Beaumont-Dark, AnthonyFowler, Rt Hon Norman
Beith, A. J.Fox, Marcus
Bendall, VivianFraser, Rt Hon Sir Hugh
Bennett, Sir Frederic (T'bay)Freud, Clement
Benyon, W. (Buckingham)Gardiner, George (Reigate)
Best, KeithGardner, Sir Edward
Bevan, David GilroyGarel-Jones, Tristan
Biffen, Rt Hon JohnGilmour, Rt Hon Sir Ian
Biggs-Davison, Sir JohnGinsburg, David
Blackburn, JohnGlyn, Dr Alan
Blaker, PeterGoodhart, Sir Philip
Body, RichardGoodlad, Alastair
Bonsor, Sir NicholasGorst, John
Boscawen, Hon RobertGow, Ian
Bottomley, Peter (W'wich W)Gower, Sir Raymond
Bowden, AndrewGrant, Sir Anthony
Boyson, Dr RhodesGrant, John (Islington C)
Braine, Sir BernardGray, Rt Hon Hamish
Bright, GrahamGreenway, Harry
Brinton, TimGrieve, Percy
Brittan, Rt. Hon. LeonGriffiths, E. (B'y St. Edm'ds)
Brooke, Hon PeterGriffiths, Peter (Portsm'th N)
Brotherton, MichaelGrist, Ian
Brown, Michael (Brigg & Sc'n)Gummer, John Selwyn
Brown, Ronald W. (H'ckn'y S)Hamilton, Hon A.
Browne, John (Winchester)Hamilton, Michael (Salisbury)
Bruce-Gardyne, JohnHampson, Dr Keith
Bryan, Sir PaulHannam,John
Buchanan-Smith, Rt. Hon. A.Haselhurst, Alan
Buck, AntonyHastings, Stephen
Budgen, NickHavers, Rt Hon Sir Michael
Bulmer, EsmondHawkins, Sir Paul
Butcher, JohnHayhoe, Barney
Butler, Hon AdamHeath, Rt Hon Edward
Carlisle, John (Luton West)Heddle, John
Carlisle, Kenneth (Lincoln)Henderson, Barry
Carlisle, Rt Hon M. (R'c'n)Heseltine, Rt Hon Michael
Cartwright, JohnHiggins, Rt Hon Terence L.
Chalker, Mrs. LyndaHill, James
Channon, Rt. Hon. PaulHogg, Hon Douglas (Gr'th'm)
Chapman, SydneyHolland, Philip (Carlton)
Churchill, W. S.Hooson, Tom
Clark, Hon A. (Plym'th, S'n)Horam, John
Clark, Sir W. (Croydon S)Hordern, Peter
Clarke, Kenneth (Rushcliffe)Howe, Rt Hon Sir Geoffrey
Clegg, Sir WalterHowell, Rt Hon D. (G'ldf'd)
Cockeram, EricHowell, Ralph (N Norfolk)
Colvin, MichaelHudson Davies, Gwilym E.
Cope, JohnHunt, David (Wirral)
Corrie, JohnHunt, John (Ravensbourne)
Costain, Sir AlbertHurd, Rt Hon Douglas
Cranborne, ViscountIrvine, Rt Hon Bryant Godman
Crawshaw, RichardIrving, Charles (Cheltenham)
Critchley, JulianJenkins, Rt Hon Roy (Hillh'd)
Crouch, DavidJessel, Toby
Cunningham, G. (Islington S)Johnson Smith, Sir Geoffrey
Dickens, GeoffreyJohnston, Russell (Inverness)
Dorrell, StephenJopling, Rt Hon Michael
Douglas-Hamilton, Lord J.Joseph, Rt Hon Sir Keith
du Cann, Rt Hon EdwardKaberry, Sir Donald
Dunlop, JohnKellett-Bowman, Mrs Elaine
Dunn, Robert (Dartford)Kershaw, Sir Anthony
Durant, TonyKimball, Sir Marcus
Dykes, HughKing, Rt Hon Tom
Eden, Rt Hon Sir JohnKnight, Mrs Jill
Edwards, Rt Hon N. (P'broke)Knox, David
Eggar, TimLamont, Norman
Elliott, Sir WilliamLang, Ian
Ellis, Tom (Wrexham)Latham, Michael
Emery, Sir PeterLawrence, Ivan
Eyre, ReginaldLawson, Rt Hon Nigel
Fairbairn, NicholasLee, John
Fairgrieve, Sir RussellLe Marchant, Spencer

Lennox-Boyd, Hon MarkRenton, Tim
Lester, Jim (Beeston)Rhodes James, Robert
Lewis, Sir Kenneth (Rutland)Rhys Williams, Sir Brandon
Lloyd, Ian (Havant & W'loo)Ridley, Hon Nicholas
Lloyd, Peter (Fareham)Rippon, Rt Hon Geoffrey
Loveridge, JohnRoberts, M. (Cardiff NW)
Luce, RichardRoberts, Wyn (Conway)
Lyell, NicholasRoper, John
Mabon, Rt Hon Dr J. DicksonRoss, Stephen (Isle of Wight)
McCrindle, RobertRossi, Hugh
Macfarlane, NeilRost, Peter
MacKay, John (Argyll)Royle, Sir Anthony
Maclennan, RobertRumbold, Mrs A. C. R.
McNair-Wilson, M. (N'bury)Sainsbury, Hon Timothy
McNair-Wilson, P. (New F'st)St. John-Stevas, Rt Hon N.
McNally, ThomasSandelson, Neville
McQuarrie, AlbertScott, Nicholas
Madel, DavidShaw, Giles (Pudsey)
Magee, BryanShaw, Sir Michael (Scarb')
Major, JohnShelton, William (Streatham)
Marland, PaulShepherd, Colin (Hereford)
Marten, Rt Hon NeilShepherd, Richard
Mates, MichaelShersby, Michael
Maude, Rt Hon Sir AngusSilvester, Fred
Mawby, RaySims, Roger
Mawhinney, Dr BrianSkeet, T. H. H.
Maxwell-Hyslop, RobinSmith, Tim (Beaconsfield)
Mayhew, PatrickSpeed, Keith
Mellor, DavidSpeller, Tony
Meyer, Sir AnthonySpence, John
Miller, Hal (B'grove)Spicer, Jim (West Dorset)
Mills, Iain (Meriden)Spicer, Michael (S Worcs)
Mills, Sir Peter (West Devon)Sproat, Iain
Miscampbell, NormanSquire, Robin
Mitchell, R. C. (Soton Itchen)Stainton, Keith
Moate, RogerStanbrook, Ivor
Molyneaux, JamesStanley, John
Monro, Sir HectorSteel, Rt Hon David
Montgomery, FergusSteen, Anthony
Moore, JohnStevens, Martin
Morgan, GeraintStewart, A. (E Renfrewshire)
Morrison, Hon P. (Chester)Stewart, Ian (Hitchin)
Mudd, DavidStokes, John
Murphy, ChristopherStradling Thomas, J.
Myles, DavidTaylor, Teddy (S'end E)
Neale, GerrardTebbit, Rt Hon Norman
Nelson, AnthonyTemple-Morris, Peter
Neubert, MichaelThatcher, Rt Hon Mrs M.
Newton, TonyThomas, Jeffrey (Abertillery)
Normanton, TomThomas, Mike (Newcastle E)
Nott, Rt Hon Sir JohnThomas, Rt Hon Peter
Ogden, EricThompson, Donald
Onslow, CranleyThorne, Neil (Ilford South)
Oppenheim, Rt Hon Mrs S.Thornton, Malcolm
Osborn, JohnTownend, John (Bridlington)
Owen, Rt Hon Dr DavidTownsend, Cyril D, (B'heath)
Page, John (Harrow, West)Trippier, David
Page, Richard (SW Herts)Trotter, Neville
Parkinson, Rt Hon Cecilvan Straubenzee, Sir W.
Parris, MatthewVaughan, Dr Gerard
Patten, John (Oxford)Viggers, Peter
Pattie, GeoffreyWaddington, David
Pawsey, JamesWainwright, R. (Colne V)
Penhaligon, DavidWakeham, John
Percival, Sir IanWaldegrave, Hon William
Peyton, Rt Hon JohnWalker, Rt Hon P. (W'cester)
Pink, R. BonnerWalker, B. (Perth)
Pitt, William HenryWalker-Smith, Rt Hon Sir D.
Pollock, AlexanderWaller, Gary
Porter, BarryWalters, Dennis
Powell, Rt Hon J.E. (S Down)Ward, John
Prentice, Rt Hon RegWarren, Kenneth
Price, Sir David (Eastleigh)Watson, John
Prior, Rt Hon JamesWellbeloved, James
Proctor, K. HarveyWells, Bowen
Pym, Rt Hon FrancisWells, John (Maidstone)
Raison, Rt Hon TimothyWheeler, John
Rathbone, TimWhitelaw, Rt Hon William
Rees, Peter (Dover and Deal)Whitney, Raymond
Rees-Davies, W. R.Wilkinson, John

Williams, D.(Montgomery)Younger, Rt Hon George
Williams, Rt Hon Mrs (Crosby)
Winterton, NicholasTellers for the Noes:
Wolfson, MarkMr. Carol Mathers and
Woodall, AlecMr. Anthony Berry.
Young, Sir George (Acton)

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith pursuant to Standing Order No. 32 (Questions on amendments):

The House divided: Ayes 298, Noes 249.

Division No. 47]

[10.12 pm

AYES

Adley, RobertCrouch, David
Aitken, JonathanDickens, Geoffrey
Alexander, RichardDorrell, Stephen
Alison, Rt Hon MichaelDouglas-Hamilton, Lord J.
Amery, Rt Hon Juliandu Cann, Rt Hon Edward
Ancram, MichaelDunn, Robert (Dartford)
Arnold, TomDurant, Tony
Aspinwall, JackDykes, Hugh
Atkins, Rt Hon H. (S'thorne)Eden, Rt Hon Sir John
Atkins, Robert (Preston N)Edwards, Rt Hon N. (P'broke)
Atkinson, David (B'm'th, E)Eggar, Tim
Baker, Kenneth(St.M'bone)Elliott, Sir William
Baker, Nicholas (N Dorset)Emery, Sir Peter
Banks, RobertEyre, Reginald
Beaumont-Dark, AnthonyFairbairn, Nicholas
Bendall, VivianFairgrieve, Sir Russell
Bennett, Sir Frederic (T'bay)Faith, Mrs Sheila
Benyon, W. (Buckingham)Farr, John
Best, KeithFenner, Mrs Peggy
Bevan, David GilroyFinsberg, Geoffrey
Biffen, Rt Hon JohnFisher, Sir Nigel
Biggs-Davison, Sir JohnFletcher, A. (Ed'nb'gh N)
Blackburn, JohnFookes, Miss Janet
Blaker, PeterFowler, Rt Hon Norman
Body, RichardFox, Marcus
Bonsor, Sir NicholasFraser, Rt Hon Sir Hugh
Boscawen, Hon RobertGardiner, George (Reigate)
Bottomley, Peter (W'wich W)Gardner, Sir Edward
Bowden, AndrewGarel-Jones, Tristan
Boyson, Dr RhodesGilmour, Rt Hon Sir Ian
Braine, Sir BernardGlyn, Dr Alan
Bright, GrahamGoodhart, Sir Philip

Brinton, TimGoodlad, Alastair
Brittan, Rt. Hon. LeonGorst, John
Brooke, Hon PeterGow, Ian
Brotherton, MichaelGower, Sir Raymond
Brown, Michael (Brigg & Sc'n)Grant, Sir Anthony
Browne, John (Winchester)Gray, Rt Hon Hamish
Bruce-Gardyne, JohnGreenway, Harry
Bryan, Sir PaulGrieve, Percy
Buchanan-Smith, Rt. Hon. A.Griffiths, E. (B'y St. Edm' ds)
Buck, AntonyGriffiths, Peter (Portsm'th N)
Budgen, NickGrist, Ian
Bulmer, EsmondGummer, John Selwyn
Butcher, JohnHamilton, Hon A.
Butler, Hon AdamHamilton, Michael (Salisbury)
Carlisle, John (Luton West)Hampson, Dr Keith
Carlisle, Kenneth (Lincoln)Hannam, John
Carlisle, Rt Hon M. (R'c'n)Haselhurst, Alan
Chalker, Mrs. LyndaHastings, Stephen
Channon, Rt. Hon. PaulHavers, Rt Hon Sir Michael
Chapman, SydneyHawkins, Sir Paul
Churchill, W. S.Hayhoe, Barney
Clark, Hon A. (Plym'th, S'n)Heath, Rt Hon Edward
Clark, Sir W. (Croydon S)Heddle, John
Clarke, Kenneth (Rushcliffe)Henderson, Barry
Clegg, Sir WalterHeseltine, Rt Hon Michael
Cockeram, EricHiggins, Rt Hon Terence L.
Colvin, MichaelHill, James
Cope, JohnHogg, Hon Douglas (Gr'th'm)
Corrie, JohnHolland, Philip (Carlton)
Costain, Sir AlbertHooson, Tom
Cranborne, ViscountHordern, Peter
Critchley, JulianHowe, Rt Hon Sir Geoffrey

Howell, Rt Hon D. (G'ldf'd)Pink, R. Bonner
Howell, Ralph (N Norfolk)Pollock, Alexander
Hunt, David (Wirral)Porter, Barry
Hunt, John (Ravensbourne)Prentice, Rt Hon Reg
Hurd, Rt Hon DouglasPrice, Sir David (Eastleigh)
Irvine, Rt Hon Bryant GodmanPrior, Rt Hon James
Irving, Charles (Cheltenham)Proctor, K. Harvey
Jessel, TobyPym, Rt Hon Francis
Jopling, Rt Hon MichaelRaison, Rt Hon Timothy
Joseph, Rt Hon Sir KeithRathbone, Tim
Kaberry, Sir DonaldRees, Peter (Dover and Deal)
Kellett-Bowman, Mrs ElaineRees-Davies, W. R.
Kimball, Sir MarcusRenton, Tim
King, Rt Hon TomRhodes James, Robert
Knight, Mrs JillRhys Williams, Sir Brandon
Knox, DavidRidley, Hon Nicholas
Lamont, NormanRippon, Rt Hon Geoffrey
Lang, IanRoberts, M. (Cardiff NW)
Latham, MichaelRoberts, Wyn (Conway)
Lawrence, IvanRossi, Hugh
Lawson, Rt Hon NigelRost, Peter
Lee, JohnRoyle, Sir Anthony
Le Marchant, SpencerRumbold, Mrs A. C. R.
Lennox-Boyd, Hon MarkSainsbury, Hon Timothy
Lester, Jim (Beeston)St. John-Stevas, Rt Hon N.
Lewis, Sir Kenneth (Rutland)Scott, Nicholas
Lloyd, Ian (Havant & W'loo)Shaw, Giles (Pudsey)
Lloyd, Peter (Fareham)Shaw, Sir Michael (Scarb')
Loveridge, JohnShelton, William (Streatham)
Luce, RichardShepherd, Colin (Hereford)
Lyell, NicholasShepherd, Richard
McCrindle, RobertShersby, Michael
Macfarlane, NeilSilvester, Fred
MacKay, John (Argyll)Sims, Roger
McNair-Wilson, M. (N'bury)Skeet, T. H. H.
McNair-Wilson, P. (New F'st)Smith, Tim (Beaconsfield)
McQuarrie, AlbertSpeed, Keith
Madel, DavidSpeller, Tony
Major, JohnSpence, John
Marland, PaulSpicer, Jim (West Dorset)
Marten, Rt Hon NeilSpicer, Michael (S Worcs)
Mates, MichaelSproat, Iain
Maude, Rt Hon Sir AngusSquire, Robin
Mawby, RayStainton, Keith
Mawhinney, Dr BrianStanbrook, Ivor
Maxwell-Hyslop, RobinStanley, John
Mayhew, PatrickSteen, Anthony
Mellor, DavidStevens, Martin
Meyer, Sir AnthonyStewart, A. (E Renfrewshire)
Miller, Hal (B'grove)Stewart, Ian (Hitchin)
Mills, Iain (Meriden)Stokes, John
Mills, Sir Peter (West Devon)Stradling Thomas, J.
Miscampbell, NormanTaylor, Teddy (S'end E)
Moate, RogerTebbit, Rt Hon Norman
Monro, Sir HectorTemple-Morris, Peter
Montgomery, FergusThatcher, Rt Hon Mrs M.
Moore, JohnThomas, Rt Hon Peter
Morgan, GeraintThompson, Donald
Morrison, Hon P. (Chester)Thorne, Neil (Ilford South)
Mudd, DavidThornton, Malcolm
Murphy, ChristopherTownend, John (Bridlington)
Myles, DavidTownsend, Cyril D, (B'heath)
Neale, GerrardTrippier, David
Nelson, AnthonyTrotter, Neville
Neubert, Michaelvan Straubenzee, Sir W.
Newton, TonyVaughan, Dr Gerard
Normanton, TomViggers, Peter
Nott, Rt Hon Sir JohnWaddington, David
Onslow, CranleyWakeham, John
Oppenheim, Rt Hon Mrs S.Waldegrave, Hon William
Osborn, JohnWalker, Rt Hon P. (W'cester)
Page, John (Harrow, West)Walker, B. (Perth)
Page, Richard (SW Herts)Walker-Smith, Rt Hon Sir D.
Parkinson, Rt Hon CecilWaller, Gary
Parris, MatthewWalters, Dennis
Patten, John (Oxford)Ward, John
Pattie, GeoffreyWarren, Kenneth
Pawsey, JamesWatson, John
Percival, Rt Hon Sir IanWells, Bowen
Peyton, Rt Hon JohnWells, John (Maidstone)

Wheeler, JohnYoung, Sir George (Acton)
Whitelaw, Rt Hon WilliamYounger, Rt Hon George
Whitney, Raymond
Wilkinson, JohnTellers for the Ayes:
Williams, D. (Montgomery)Mr. Carol Mather and
Winterton, NicholasMr. Anthony Berry.
Wolfson, Mark

NOES

Abse, LeoFord, Ben
Adams, AllenForrester, John
Allaun, FrankFoster, Derek
Alton, DavidFoulkes, George
Anderson, DonaldFraser, J. (Lamb'th, N'w'd)
Archer, Rt Hon PeterFreeson, Rt Hon Reginald
Ashley, Rt Hon JackFreud, Clement
Ashton, JoeGarrett, John (Norwich S)
Atkinson, N. (H'gey,)Garrett, W. E. (Wallsend)
Barnett, Guy (Greenwich)George, Bruce
Beith, A. J.Ginsburg, David
Benn, Rt Hon TonyGolding, John
Bennett, Andrew (St'kp't N)Gourlay, Harry
Booth, Rt Hon AlbertGraham, Ted
Bottomley, Rt Hon A. (M'b'ro)Grant, John (Islington C)
Bray, Dr JeremyHamilton, James (Bothwell)
Brown, Hugh D. (Provan)Hamilton, W. W. (C'tral Fife)
Brown, R. C. (N' castle W)Hardy, Peter
Brown, Ronald W. (H'ckn'y S)Harman, Harriet (Peckham)
Brown, Ron (E'burgh, Leith)Harrison, Rt Hon Walter
Buchan, NormanHattersley, Rt Hon Roy
Callaghan, Rt Hon J.Haynes, Frank
Campbell, IanHealey, Rt Hon Denis
Campbell-Savours, DaleHeffer, Eric S.
Canavan, DennisHogg, N. (E Dunb't'nshire)
Cant, R. B.Holland, S. (L'b'th, Vauxh'll)
Carter-Jones, LewisHome Robertson, John
Cartwright, JohnHomewood, William
Clark, Dr David (S Shields)Hooley, Frank
Clarke, Thomas (C'b'dge, A'rie)Horam, John
Cocks, Rt Hon M. (B'stol S)Howell, Rt Hon D.
Cohen, StanleyHowells, Geraint
Concannon, Rt Hon J. D.Hoyle, Douglas
Conlan, BernardHuckfield, Les
Cook, Robin F.Hudson Davies, Gwilym E.
Cowans, HarryHughes, Mark (Durham)
Cox, T. (W'dsw'th, Toot'g)Hughes, Robert (Aberdeen N)
Craigen, J. M. (G'gow, M'hill)Hughes, Roy (Newport)
Crawshaw, RichardJanner, Hon Greville
Crowther, StanJay, Rt Hon Douglas
Cryer, BobJenkins, Rt Hon Roy (Hillh'd)
Cunliffe, LawrenceJohn, Brynmor
Cunningham, G. (Islington S)Johnson, James (Hull West)
Cunningham, Dr J. (W'h'n)Johnson, Walter (Derby S)
Dalyell, TamJohnston, Russell (Inverness)
Davidson, ArthurJones, Rt Hon Alec (Rh'dda)
Davies, Rt Hon Denzil (L'lli)Kaufman, Rt Hon Gerald
Davis, Clinton (Hackney C)Kerr, Russell
Davis, Terry (B'ham, Stechf'd)Kilroy-Silk, Robert
Deakins, EricKinnock, Neil
Dean, Joseph (Leeds West)Lambie, David
Dewar, DonaldLamond, James
Dixon, DonaldLeadbitter, Ted
Dobson, FrankLeighton, Ronald
Dormand, JackLewis, Arthur (N'ham NW)
Douglas, DickLewis, Ron (Carlisle)
Dubs, AlfredLitherland, Robert
Dunnett, JackLofthouse, Geoffrey
Dunwoody, Hon Mrs G.Lyon, Alexander (York)
Eastham, KenMabon, Rt Hon Dr J. Dickson
Edwards, R. (W'hampt'n S E)McDonald, Dr Oonagh
Ellis, R. (NE D'bysh're)McElhone, Mrs Helen
Ellis, Tom (Wrexham)McGuire, Michael (Ince)
Ennals, Rt Hon DavidMcKay, Allen (Penistone)
Evans, Ioan (Aberdare)McKelvey, William
Evans, John (Newton)MacKenzie, Rt Hon Gregor
Faulds, AndrewMaclennan, Robert
Field, FrankMcNally, Thomas
Fitch, AlanMcNamara, Kevin
Flannery, MartinMcWilliam, John
Foot, Rt Hon MichaelMagee, Bryan

Marks, KennethSilkin, Rt Hon J. (Deptford)
Marshall, D (G'gow S'ton)Silkin, Rt Hon S. C. (Dulwich)
Marshall, Dr Edmund (Goole)Silverman, Julius
Marshall, Jim (Leicester S)Skinner, Dennis
Martin, M (G'gow S'burn)Smith, Rt Hon J. (N Lanark)
Mason, Rt Hon RoySnape, Peter
Maxton, JohnSoley, Clive
Maynard, Miss JoanSpearing, Nigel
Meacher, MichaelSpellar, John Francis (B'ham)
Mikardo, IanSpriggs, Leslie
Millan, Rt Hon BruceStallard, A. W.
Miller, Dr M. S. (E Kilbride)Steel, Rt Hon David
Mitchell, R. C. (Soton Itchen)Stewart, Rt Hon D. (W Isles)
Morris, Rt Hon C. (O'shaw)Stoddart, David
Morris, Rt Hon J. (Aberavon)Stott, Roger
Morton, GeorgeStrang, Gavin
Moyle, Rt Hon RolandStraw, Jack
Newens, StanleySummerskill, Hon Dr Shirley
Oakes, Rt Hon GordonTaylor, Mrs Ann (Bolton W)
Ogden, EricThomas, Dafydd (Merioneth)
O'Neill, MartinThomas, Jeffrey (Abertillery)
Orme, Rt Hon StanleyThomas, Mike (Newcastle E)
Owen, Rt Hon Dr DavidThomas, Dr R. (Carmarthen)
Palmer, ArthurThorne, Stan (Preston South)
Park, GeorgeTilley, John
Parker, JohnTinn, James
Parry, RobertTorney, Tom
Pavitt, LaurieVarley, Rt Hon Eric G.
Pendry, TomWainwright, E. (Dearne V)
Penhaligon, DavidWainwright, R. (Colne V)
Pitt, William HenryWalker, Rt Hon H. (D'caster)
Powell, Raymond (Ogmore)Wardell, Gareth
Prescott, JohnWatkins, David
Price, C. (Lewisham W)Weetch, Ken
Race, RegWellbeloved, James
Radice, GilesWelsh, Michael
Rees, Rt Hon M (Leeds S)White, Frank R.
Richardson, JoWhite, J. (G'gow Pollok)
Roberts, Albert (Normanton)Whitehead, Phillip
Roberts, Allan (Bootle)Whitlock, William
Roberts, Ernest (Hackney N)Wigley, Dafydd
Roberts, Gwilym (Cannock)Willey, Rt Hon Frederick
Robertson, GeorgeWilliams, Rt Hon A. (S'sea W)
Robinson, G. (Coventry NW)Williams, Rt Hon Mrs (Crosby)
Rooker, J. W.Wilson, Gordon (Dundee E)
Roper, JohnWilson, Rt Hon Sir H. (H'ton)
Ross, Ernest (Dundee West)Wilson, William (C'try SE)
Ross, Stephen (Isle of Wight)Winnick, David
Rowlands, TedWoolmer, Kenneth
Ryman, JohnWright, Sheila
Sandelson, NevilleYoung, David (Bolton E)
Sever, John
Sheerman, BarryTellers for the Noes:
Sheldon, Rt Hon R.Mr. Hugh McCartney and
Shore, Rt Hon PeterMr. Austin Mitchell.
Short, Mrs Renée

Question accordingly agreed to.

Resolved,

'That this House notes that Government spending and borrowing are firmly under control and that inflation in the United Kingdom fell more in 1982 than in any other major country; rejects the reimposition of exchange controls and welcomes Her Majesty's Government's determination to maintain policies needed to combat inflation, and hence encourage growth and employment on a secure and sustainable basis.'