Dáil Éireann debate -
Tuesday, 19 Apr 1977

Vol. 298 No. 7

Bretton Woods Agreements (Amendment) Bill, 1977: Second Stage (Resumed).

Mr. Esmonde

I had only just started to speak on this Bill at the adjournment of the House. I had listened with some interest to Deputy Colley's contribution and found myself very much in agreement with what he had stated. This Bill arises by virtue of the practical failure of the present Bretton Woods Agreement and arises as a result of five years' discussions and negotiations between the members of the International Monetary Fund. It might be well to have a look at the reasons for the present situation and the reasons for the shortcomings of Bretton Woods to date.

In the first place, the Bretton Woods which was set up in 1944 did not provide an adjustment system of any kind and as a result it forced countries to fall back upon individual balance of payments policies. There was a lack of unity, and nationalism came very much to the fore. This resulted mainly in ad hoc nationalistic policies that were inimical to any concerted action in the international monetary field. One must remember that at the time of Bretton Woods countries were coming out of the European turmoil and a very difficult post-war situation. Countries wanted to show their strength and viability to the rest of the world, and it was natural that the Ministers for Finance and Governments of the European countries kept as far away as they could from devaluation and revaluation of their currencies, which indeed had become very much a plaything between the political parties in the various European Parliaments, and it was regarded as being a failure on the part of a Government to have to have recourse to devaluation. The result of these very nationalistic policies was that the rates of exchange between the various currencies became very unreal and were exacerbated by the attitude of the various nations. This gave rise to a very unreal situation.

One must realise also when looking at the situation evolving from Bretton Woods that Bretton Woods was a completely new concept. I understand that there were about 720 people present at the setting up of Bretton Woods and at the discussions which took place. I think it is probably very fair to say that only a bare handful of the delegates, Ministers and financiers, who were there realised what it was all about and it came down to a virtual confrontation between the late Lord Keynes and the Under Secretary of the American Treasury. As we are talking about the immediate post-war years, it is natural enough that the American viewpoint would probably carry a great deal more weight than any view expressed by anyone else. In particular— and this is where Bretton Woods really showed its weakness—there was no clear conception in the mind of its founders of the form which international liquidity would take under the system.

Gold was to be the international unit of account but quite clearly there would not be enough gold to go around. National currencies, particularly the £ and the US dollar would augment gold and serve as reserve and intervention currencies. Unfortunately, this ensured that the international currency system and international exchange system would become a gold exchange standard based upon a gold-backed dollar. The dollar would be virtually the only currency convertible to gold. Subsequent to this in gold and the currency holdings of individual currencies held as first-line international liquidity by central banks there was a meagre augmentation of that fund. Members might draw upon the fund's currency pool up to a certain amount and under stipulated conditions. One of these which I suppose was breached more often than observed was that only 25 per cent of a nation's amount of the pool could be drawn in any 12 months. There were provisions for exemption from those requirements and these exemptions had to be availed of. The net result was that there was a considerable amount of confusion. All countries were expected to contribute their currencies to the fund but, in fact, very limited numbers of currencies came in demand. Indeed, the fund became rather a waste paper basket, a repository of a considerable amount of unwanted currency, whilst its holdings of key currencies, particularly the dollar, were insufficient. This came very much to light in the early 1960s and had a very bad effect on international trade. It gave rise to international liquidity difficulties and considerable liquidity shortages and this then resulted in what are now called the SDRs, created at the behest of and in consultation with a group of ten. That occurred in 1967. There was a further amendment to the make-up of the SDRs, commonly called the basket currencies, on which the SDRs were based. There was a tendency and an effort to get away from being tied to gold because of the limited amount and its effect of contracting international trade.

There was another problem. Europe after the war was decimated and badly needed to build herself up again. She required the refitting of her industries and the only source from which she could get assistance was America. The situation came about, therefore, whereby the US dollar virtually ruled the world and the availability of the dollar was all important in the strategy and policies of the western world. There was also the disparity in size of the member countries and, as I have mentioned, the great dominance of the United States.

There are some aspects of this that one should also bear in mind. The dollar was an intervention currency and this meant that the dollar could not be altered in relation to its par value because every currency in the world was virtually tied to the dollar. When Bretton Woods was set up it provided for this par value system but it did not provide for changes, for devaluation as such. There is a provision for a change of up to 10 per cent but it is a once only change in par value. I think everybody will agree that it was an extraordinarily shortsighted view at the time. It was certainly not in keeping with the views of Lord Keynes and I think that Keynesian thinking has now more or less won out and that is why we have this new approach but it has taken a very long time to come about.

If the dollar parity had been changed it would have been a major political event for the world, certainly one that the United States turned its face against. One must bear in mind that it was also a reserve currency. Central banks all over the world would be holding the dollar as part of their reserves and the devaluation of the dollar would have very grave implications for the countries holding the dollar as a reserve currency. Taking the years from 1944 up to the 1960's when this liquidity problem arose, the situation was dealt with by various mending operations but was largely dealt with by the United States running a chronic deficit in its balance of payments and this meant that more dollars were available outside the United States. This was thought to be the only method whereby the international currency system could work. It has been classed as a doctrine of benign neglect. In reality we see that the question of international liquidity is a political one. After all, America was nursemaid to western Europe after the war.

This naturally became tied up, as time went on, with national surpluses and deficits. It became very apparent also, due to this difficulty about the shortage of gold, that international liquidity could be created only by agreement and that that agreement had to come between the major countries, by which term I mean the major trading countries. The dollar was acceptable to the rest of the trading world, though there is always a limitation that a major country like the US running a constant deficit may have the effect of undermining its own currency, and even though there may not be a purposive devaluation as such there may be what could be called an official devaluation of the currency. This becomes most exemplified when we look at the price of international commodities, because basically a currency has value only in relation to the commodities it can buy.

Another aspect of this liquidity problem is that we cannot talk merely about world liquidity. What we are really talking about is liquidity between the trading nations and groups involved that make use of currency, and this has brought to light considerable difficulties in relation to the developing countries. They are always short of currency. They are always in a situation of being net purchasers. It is necessary for them to be so in order to build up their structure. Eventually they will have their own industries and they can become exporting countries of industrial products, which always carry the highest reward. They may exist for a while as primary producers of one product, but that is really putting all one's eggs in one basket. The failure of a crop can cause very serious dislocation of the economy of a country, particularly a developing country. I am glad to see that under the Bretton Woods Agreement there is provision for the auctioning of gold in the fund and that the profit made from that will be put into a fund for the use of developing countries and developing nations.

There is also a useful change in that the new system under the amended Bretton Woods Agreement takes a radically different approach from the original agreement and now each country will be free to adopt the exchange rate arrangement of its own choice. In other words there will be reality, maybe not absolute reality, but at least all nations will have an opportunity of looking at their situation in relation to their own currencies. This also has a corollary that, in the event of it being necessary to change the value of the currency in relation to other currencies, this will be subject to surveillance by and consultation with the International Monetary Fund. We have seen how the dollar managed to perform its functions by virtue of co-operation and unofficial agreement. There is an extension of this to the everyday running and to all other currencies.

There is also provision under the amended agreement to go as deeply as the fiscal and financial policies of the individual member nations go. This is very important because there can be blocs of countries where one side is deficit and the other side is surplus. It is interesting to note that the attitude of a country in relation to liquidity is very much governed by the state of its individual balance of payments. Those countries in favour of international liquidity have deficits and those countries with surpluses are not too keen on extra liquidity. The deficit countries are Britain and the US, and generally speaking the surplus bloc is the EEC countries.

The problem may be deeper than that. We had questions of employment and inflation. We must remember that the EEC countries were ravaged by inflation during and after two world wars and that Britain and the US were concerned with unemployment and its dangers. The EEC countries have also evinced a considerable fear of inflation as being a spill-over from the US and Britain. There are two main intervention currencies, the £ sterling and the US dollar. This is one of the reasons why one now notes a strong current of theoretical monitors' writings, which are not to be found necessarily outside the Central Bank reports. They seem to be becoming very frequent contributors to magazines produced by banks and by central banks.

These are general remarks. They are all part of the picture. In relation to our situation I agree with Deputy Colley about the breaking of the link with sterling. Other people may not share this view. The Minister for Finance is of the same opinion as Deputy Colley. We must remember that we are a small, open economy and that the really important question when we come to consider whether or not to break the link with sterling is: where does our trade go? It is interesting to note that in recent times there has been a considerable increase in the percentage of our trade that goes to the sterling area proper as distinct from Europe. There is likely to be a slight swing back from that as a result of the green £ negotiations, but there is not much point in talking about the breaking of the link with sterling if a large part of our trade is into the UK.

If we broke the link with sterling, the Irish pound might go down before it found its level. This would have very serious implications for exporters to England. It would mean that they would be getting less for their goods. It would also mean increased costings which would affect the cost of living and we would probably have to make quite severe sacrifices. It would be a very difficult situation for whoever might be the Government of the day to explain to the Irish people that they might have to change their system of life. Whilst a link with sterling has quite severe handicaps—we have to pay a price for it—of the options open to us that is the best at present. If we were to break the link with sterling, being a small country with a small open economy, we would have to consider to what country our currency would be linked. A large part of our trade is export-import trade with England. The reality and unreality of breaking the link with sterling becomes more apparent, having regard to the amount of trade that we have with England. There might be some argument in favour of a small floating margin between ourselves and the pound but it would not be worthwhile. It would also mean the setting up of a finance market and a mechanism to deal with it. That has its own costings and difficulties and whatever one might think about the pound sterling and its difficulties in recent times, at least it is a known currency, much availed of in international markets, and it has a first-class finance market in London with all the facilities that go with it. The fact that we are linked with sterling does not mean that we are politically linked. We have our own economic independence. It is a way of pegging our currency to some known and acceptable international currency.

Deputy Colley referred to the floating currencies interfering with trade. This is a very big subject. Admittedly, it is easier to plan ahead over a two-year contract period if one has a fixed parity but we have recently seen considerable speculation in currency. Despite the fact that currencies may be linked and tied to a certain value, it has not always worked out that way. There can be scarcities which give rise to other markets arising. This could also rise, by way of implications, in the interest rate structure in different countries. The previous governing body of the International Monetary Fund was virtually only an advisory body. I notice that the council this time seems to have more power. Deputy Colley asked the Minister to deal a little more with that than had been dealt with in the opening statement by the Minister for Justice when introducing this Bill on behalf of the Minister. I, too, would like to hear a little more on that aspect, where we come into it and how we would be represented.

I referred to the fact that a currency is based on the commodities that it will buy and the strength of a currency is based on the goods and industry that back it. We have seen a rather unfortunate incident in the last few years which was described as the big sale of wheat surpluses in America under what was described as PL 480. The international financiers should busy themselves a little more about a system for control of large stocks of primary products. This would involve crude oil and food such as wheat, soya beans, coffee and other essential primary products. It looks as if there is a great deal of international politics behind the dealings in these goods. It is far too risky a situation to leave the dealings in these goods in large quantities to private enterprises or to leave it in the hands of private merchants. I am not advocating international socialism. I am advocating international policing of the sales, purchases and distribution of vital primary products. A wrong decision made could have just as great an effect as some new nuclear discovery or a discovery in the technical area of war-mongering implements. It can change the balance of economic power. It can have very serious implications for developing countries and for smaller nations. If the international Monetary Fund is to consider further the basket of currencies, they might also consider relating the security that stands behind a currency to the international stockpiling situation of primary products.

Mr. Halligan

I apologise to the House for coming less prepared for this debate than I would have preferred due to a combination of circumstances beyond my control.

The House should not spend much time shedding tears over the demise of the International Monetary Fund in the form in which it was constructed in 1944 at Bretton Woods. It was a passable attempt to bring some order into international monetary affairs given the background of chaos and almost complete disorder which had characterised the situation in the 1930s, and given also the fact that the war had, to an extent, rehabilitated and placed in their proper perspective the contributions of Keynes the greatest economist of this century, to monetary policy. Bretton Woods gave Keynes the opportunity of putting forward views which were accepted to some extent but which had been disregarded previously and almost universally rejected by his fellow academic economists, by the financial establishment, the financial press and, not least, by the central banks. However, as central banks are invariably wrong, this latter rejection must have been a source of consolation rather than anger.

The previous speaker has indicated that the Bretton Woods Agreement did not reflect truly the views that were expressed by Keynes at Bretton Woods and that the arrangement arrived at was imposed by the Americans, particularly by Harry Dexter White, and that they fell far short of what Keynes believed to be necessary, first, for the creation of sufficient international liquidity and, secondly, for the creation of a situation in which governments would have flexibility to pursue their own internal domestic policies while at the same time running their economies consonant with good international practice.

The original Bretton Woods agreement was built around a par-value system and the concept of gold as the ultimate reserve. One could not possibly find two more ridiculous premises on which to base an international monetary system. In the first place, the par-value system, operating supposedly in a market situation, runs against the very theory on which all economists had agreed universally markets should operate. One can imagine orthodox economists throwing up their hands in horror at the concept of managed markets for any other product or commodity but yet joining hands in agreement in believing that one particular commodity should be the product of a managed market. That commodity, by universal consent, is money. In other words, there can be a market economy provided that that philosophical idea of a free market is not allowed spill over into the more important area of money, the most important area of all so far as the economy is concerned for those who wish to profit from it, and, one suspects, for many economists who love money so much they hate to be without it.

The par-value system, on which the IMF was based, was doomed inevitably to collapse at some stage. There could have been no more ridiculous restriction on the growth of international liquidity than the concept that the quantum of gold available in the world should be determined by one of the suscribing signatories to the agreement, the US, fixing the gold price and thereby determining the amount of international liquidity. Indeed, I recall in 1962 and 1963 writing identical answers to two different examination papers about the price of gold. That is a long time ago, but I then regarded the price of gold as a ridiculous limitation on the growth of international liquidity, which, at that time, was emerging as a serious international problem in respect of world trade. Yet the price was being determined politically. This was due in no small measure to the fact that the two major suppliers were politically inimical to the US. These were South Africa and the Soviet Union. Eventually, both the par-value system and the gold reserve concept were abandoned, not as a result of theoretical insights or analysis but simply under the pressure of events, a pressure which proved greater than economists and greater than the governments those economists misadvised.

I shed no tears for the demise of the IMF in the form in which we have known it but I welcome it in the somewhat new garb in which it is now presented. It is designed to meet a set of objectives which could not be argued against even by Lucifer himself, so angelic and pure are they in their intention to create an international order somewhat just beneath the level of perfection. We live in a human world of imperfection. We are dealing in a world in which money, particularly at international level, is part of the realm of international policy rather than of international monetary economics. We are dealing now with a new world economic order. We have witnessed the emergence of new and powerful economic forces and of new super powers. We have also been brought to the new situation by the policy of former President Nixon, whom Galbraith flippantly described as "the greatest socialist of all". We are moving towards a sensible approach under the arrangements outlined in the new IMF articles, and not before time.

I believe in a system of flexible exchanges. I do not accept the horror of those who regard this as being the ultimate betrayal of the capitalist system of rationality. The necessities of the situation have imposed a desirable international solution. I trust that, although the new articles for the IMF make provision for a possible return to a modified par-value system, such a road will never be travelled because there is no doubt that in the past grave economic dislocations with far-ranging economic and social consequences have been caused by adherence to values which were not justifiable economically. One can think of the return of Britain in the twenties to the gold standard, and the unemployment pressures which that induced in the UK, as an example of the lunacy that sometimes pervades this area of policy. One can recall the unsuccessful attempt of the Labour Government in Britain in 1964 to defend the then dollar value of the £ sterling. That decision, which we understand was taken in the first three days of the Wilson administration of 1964, ultimately consigned the party to opposition and exacerbated the already serious economic problems in the UK.

Therefore, this is an area in which there is a very dangerous mixture of politics and economics, where very often myth and mythology pass under the scientific guise of elaborate theories. I should hope that on this occasion the world community will not be dragged back by some misguided economist towards a system of par-value or to the almost mythological concept of gold reserves. We look forward to a system of flexible exchanges and to the creation of an international reserve currency somewhat akin to that which Keynes proposed as long ago as 1944. This Bill points the road to sanity, although nobody can take credit for it since that sanity was imposed by events and not by men, certainly not by those who call themselves statemen.

I want also to talk about our domestic exchange rate for the very good reason that the Minister introduced it in his speech, although very briefly, and also because Deputy Colley brought it into his contribution. It seemed to me that they agreed; and perhaps, even in a general election year, one could with impunity be tempted to disagree with both without suffering politically from a party point of view. It seems that what we are saying is this: we are all now agreed that it is theoretically established that in a small open economy with a fixed exchange rate with the currency of a large trading partner the small economy imports the long term rate of inflation of its trading partner. We appear to agree on this. The Minister for Finance stated it in his budget speech of 1976. I think Deputy Colley came to the same conclusion speaking on this Bill. But we then go on to talk simultaneously about domestic causes of inflation. I suggest this is totally illogical. You cannot, on one hand, accept the general thesis that a small open economy with a fixed exchange rate with a large trading partner imports the long run rate of inflation of its trading partner and then advert to purely domestic causes of inflation. You can accept the fact that there may be variations around the long run trend. This is not just conceptually acceptable; it has to happen. If it happens to be an average, one is talking about something that fluctuates around a mean in any case. The large trading partner with whom you are linked is itself oscillating around an average and it is conceptually acceptable that you should oscillate around the oscillation. But despite these oscillations it is inevitable that you are on the same path. Once we are linked inflexibly to the currency of the other economy so, we cannot say, on one hand, that we can divide the causes of inflation in Ireland into domestic and external and, at the same time, agree that the rate of inflation is externally caused by the par linkage with sterling. It is true that the Central Bank have made that illogical statement—not unexpectedly. It is true that they have got a pretty elaborate analysis to distinguish between domestically created and internationally created inflation.

But if you accept the thesis I have outlined you must ask the following question: will the United Kingdom rate of inflation remain high? Is it likely to remain higher than that which is current in our continental trading partners, specifically the other members of EEC? Much play was made in the past 12 months of the fact that the British rate of inflation was higher than the Irish rate of inflation—as if this proved, on the one hand, that the thesis to which I have adverted was incorrect and, on the other hand, that the Government here were performing worse than the United Kingdom Government. But last weekend it was pointed out that the UK rate of inflation is now running at 17.6 per cent on an annual basis, with many price increases in the pipeline and therefore likely to go much higher.

I see no prospect of any diminution in the British rate of inflation and no possibility of it coming down to single figures as the Chancellor of the Exchequer, Mr. Healy, seems to think possible. Further, I think it most unlikely that phase 3 of the wages and incomes policy will be possible. One had only to look at the television programmes of last week, as those in the multichannel area could do, and see the BBC programme in which many economic interests were involved, not least the trade unions, to judge how weak were the prospects of a phase 3 in the British incomes policy. I said nine months ago that in the coming summer I foresaw a wage-led inflation in the UK on top of the existing rate of inflation. There is no such thing, to quote Jack Jones of the Transport and General Workers Union, "as an orderly return to free collective wage bargaining". Free wage bargaining is a disorderly affair, as is currently being seen at Heathrow and in British Leyland. I think that key unions, such as the AUEW, will eventually come out in opposition to the new wages policy and be added to the very large and important body of trade union opinion in that country which is ideologically opposed to it and to those who also oppose it simply on the grounds that they would get more out of free collective bargaining. I think phase 3 will disappear as a possibility this summer.

In these circumstances I believe that those with the greatest economic muscle will use it to restore differentials and that there will not only be a very high rate of inflation in the UK but also a massive increase in unemployment. The prospect of two million people unemployed in the UK is not beyond the bounds of possibility. The economic consequences for us, I think, are that we shall then continue to have high interest rates, far higher than our continental partners. We shall continue to have, in the long run, a high rate of inflation and high wage demands in national pay agreements. There will be a continuing inhibition on investment and therefore unemployment growth precisely because of this combination of high interest rates and high wage demands.

I have consistently argued that we have a way out of this situation because we have unique institutional arrangements here which do not exist in the UK for which there are no comparisons, and which are far more sophisticated than anything they have, If one wants an analogy one must go to advanced countries like Scandinavia. That provides us with the key to a very difficult economic situation and gives us the possibility of changing our exchange relationship with the UK. I refer to the Employer Labour Conference. Deputy Colley rightly made the point—and I do not disagree—that if we broke the link it would necessitate new discipline which would be tough. I do not deny that because there is no such thing as a cost-less or easy policy in getting down from a high rate of inflation to a regime somewhat akin to the EEC average. I accept that fact and I advance this argument of breaking the sterling link at par only because we have in the Employer Labour Conference a sophisticated arrangement for ordering incomes. In addition, superadded to that conference, we have the tripartite talks. The two together give us a highly sophisticated apparatus for dealing with incomes, prices, taxation policy and social expenditure, all of which must be combined, in one package so that consensus can be achieved.

I say consensus could be achieved in respect of incomes policy in the light of Government policy on taxation, prices, social expenditure, and so on, which would enable us to keep the rate of income growth down to such a level that, over a period, we could slide on to a different inflation rate, and move closer to and eventually coincide with the continental rate.

The recent Economist survey on the Irish economy quotes the former secretary of the Department of Finance and the former Governor of the Central Bank, Dr. Whitaker, on this point. He raised doubts as to whether or not the trade union movement would buckle under the pretty iron discipline which would be required to achieve this aim. That is an opinion. However much I respect the individual and his opinions, I take it to be an opinion based on a false evaluation of what would be forthcoming from the Irish trade union movement. I expressed the belief at a seminar in 1975, at which he was present, on the question of monetary alignments and economic and monetary union, that the Irish trade union movement would play their role responsibly, because the pay-off of a drop in the rate of inflation must obviously be an increase in employment. In the current unemployment context I cannot see how anyone would have serious justification in opposing moderate income increases in a situation where the rate of inflation was itself moderating and where there was a guarantee that this policy would lead to an increase in investment and therefore to an increase in employment.

The question of breaking the link is a political one not an economic one. If one accepts the economic thesis, which Professor Williamson said at the symposium to which I referred is the most securely established thesis in international monetary economics, that is the linkage between a fixed exchange rate and inflation, the question is: do we believe the British rates of inflation will continue high over the medium term at a 7 to 8 per cent differential over our continental trading partners and do we want that for our own country? I believe the British rates of inflation will continue to oscillate between 10 to 15 per cent per annum. That is the prospect which also faces us no matter who sits behind the desk in the Department of Finance if we maintain this par value system with sterling.

The par linkage with sterling is without parallel in international monetary history. One can go to the Library and read Fetter's account of the Irish £, 1797 to 1826, and find the origins there of this policy in a report which was chaired by a man whose portrait is outside the Library. It is very fitting that John Foster, the last Speaker of the Irish House of Commons should be the man who to a certain extent was responsible for consigning us to this ridiculous policy. We have pursued it without change since 1826. No other currency in the world has been linked at par with another currency for 150 years or, indeed, for anything approaching that period.

With respect to the Central Bank, the Department of Finance and those who have been the chief political heads of that Department, the onus is on those who believe we should continue to maintain this policy to prove it was the correct one over 150 years, and still remains so. It is simply not possible that it was the correct policy in every period over 150 years. Yet we maintained it. There was a very strong school of economists who were derided and disregarded, particularly in the 1940s, who propounded a different policy but who, unfortunately, were beaten in the intellectual argument by the schools of economics in UCD and in Trinity. I refer to the economists in UCC, notably Busteed and, not least, Alfred O'Rahilly.

Quite frankly, I would be undismayed by the weight of authoritative advice I might hear from the Minister or anybody else as to why we should maintain the existing policy. Authoritative advice in matters of international monetary economics has invariably been on the wrong side. It is legitimate in my view to advance the proposition as I now do that one of the primary causes of underdevelopment in the Irish economy over the past 55 years, for about 50 of those years, has been a gross overvaluation of the Irish £ which, in effect, constituted a tax on our exports and a subsidy on our imports.

Other economies have used the reverse policy deliberately, and in some cases against what was best for the international economic order, so that they could advance their own national interests. For example, one can think of the amount of abuse which the Japanese had to put up with because of the undervaluation of the yen. In Germany they also deliberately undervalued the mark in order to develop their own economy. With the most clear-cut and obvious consequences, we pursued the opposite policy. The reality is that in terms of monetary policy, because of the linkage of one for one between the Irish £ and the British £, because we are a small open economy trading with a dominant trading partner, we have no sovereign freedom in the area of monetary policy. In that sense, it is just the same as if the Union Jack were still flying over the GPO.

It is characteristic of those who say they accept this argument that inevitably we import a long-run rate of inflation, that they always say "Now is not the time to break the link." I have had this argument over two or three years with one individual and every time I met him he says, six months ago was the correct time to break the link but not now. It reminds me of St. Augustine: "Lord make me pure but not now." We are all advocates of Augustinian economics on this matter: let us break the link with sterling but not now. Let us get our rate of inflation down below the British rate of inflation and then we can do it. But we can only get our rate of inflation down below the British rate of inflation over a very short period of time if we accept the fact that there can only be short-run deviations around the long-run British trends.

May I suggest this is such an occasion? The British rate of inflation is now on the increase. In the short run, the Irish rate of inflation is on the decrease. We have just had a national pay agreement. The British are faced with the prospect of no agreement on the incomes front. Their major airport is closed. Could we wish to see any greater manifestation of the British economic disease than that? They are not likely to get out of that situation in the foreseeable future. The £ is stabilised at the moment because of the apparent temporary resolution of the sterling balances question. I suggest it will not be so stable by the end of this year. If we are to be tempted into breaking the last remaining link, the umbilical cord, with Britain this is the time to do it.

It may be that this very modest and very technical Bill provides us with an unique opportunity to make this type of contribution in this House. It is not often that the affairs of this House are so ordered that one can speak on matters of immediate and national relevance. I thank you, Sir, for your indulgence in allowing me to stray a little outside the rather technical restrictions of this Bill because I really believe the prospects for this economy can be greatly enhanced if we take unto ourselves the full responsibility for running our own affairs and for giving ourselves the freedom to operate in the area of monetary policy without having to import, willy-nilly, British monetary policy which is invariably opposed to our needs and necessities.

During the course of the past four years the Minister for Finance has been subjected, on occasion, to a great deal of criticism, indeed, one might say abuse. He will accept the fact that I have not been silent in offering criticism of him on occasion. When I was a Member of the other House I said, particularly in the field of taxation reforms, that I regarded him as the best Minister for Finance we ever had and I commended him for his reforms. I hope that, in the closing days of this Dáil, he might crown his other achievements by at last taking Irish monetary policy and the Irish currency out of the tutelage of a dying and decaying currency.

Minister for Finance (Mr. R. Ryan)

I am grateful to Deputies Colley, Esmonde and Halligan for their support of this Bill and for their very reasoned comments on what is rather technical legislation. The real purpose of this debate is to consider the Bill and its background. Deputies Esmonde and Colley asked for an elaboration of Ireland's role in relation to a possible new International Monetary Fund organ—the Council.

The council will only come into operation when there is a decision to that effect by countries which have 85 per cent of the total voting power of the IMF. That voting power is related not merely to membership, but to the weight of membership depending upon the resources of individual members. When it comes into operation it will be similar in composition and representation to the present interim committee in that each country or group of countries represented in the fund by an executive director would be entitled to appoint a member to the council. As in the past, that member would be a Government Minister, or a person of comparable rank, from the constituencies. Each member would have not more than seven associates who would act as advisers. The structure, therefore, would be quite similar to that operating in the interim committee.

For the purpose of representation in the IMF, Ireland is grouped in a constituency with Canada and the Caribbean countries, a constituency in which we find ourselves very much at home. We are in a position to understand the problems of other countries and we get them to understand ours. We are unique in the European Community by being a member in the IMF with people who are not members of the Community and not having any other Community member in our group.

The practice has been and is, in relation to other countries in most cases, that the spokesman for a particular constituency is the Finance Minister of the member having the largest voting weight. In the past, decisions were taken in the interim committee on the basis of constituencies. This meant that sometimes a minority opinion within a constituency would not be reflected in the vote of that constituency, although the practice normally was for the spokesman of the constituency to put other members on notice of the reservations of the minority interest within his own constituency. When the distinguished Finance Minister of Canada was the chairman of the interim committee it fell to myself to be the chairman of the Canadian-Irish-Caribbean constituency. Now that Canada no longer occupies the chair, it is probable that in the future the Canadian Finance Minister will represent the constituency as a whole. He will be able to cast votes separately on behalf of individual member countries where there is not a common view.

The interim committee, and the Committee of Twenty before that, had not power to make decisions. They were more advisory than controlling institutions. The new council would be more of a controlling institution. The need, therefore, to have votes correctly reflect the overall membership of the fund has been recognised and will work in the way I have described. Therefore, it could be said that our role in the future can be more effective and can be seen to be more effective.

As far as the amendment of the articles is concerned, I would agree with those who said it is largely a legalising of the status quo. It recognises that the market forces of the world have operated in such a way as to make impossible the preservation of fixed parities. For some time past the IMF have recognised the need to depart from the strict letter of the law, although there has been a common anxiety to operate with a certain amount of discipline and consultation.

It must be accepted that in legalising the status quo the IMF are responding to the need for much greater flexibility —a flexibility which has clearly been necessitated by the speed and extent of economic change in the seventies. It is unlikely that we will return to an era of economic global stability of the kind we experienced in the fifties and early sixties for a long time to come. It is evident now that even with the best will in the world the power value system of the Bretton Woods type, despite its very obvious attractions because of the certainties which it provides, could not have survived the turbulent conditions which have characterised the international monetary environment in recent times. The essential characteristic of the system now proposed in the amended articles is its capacity for adaptation to accommodate the demands of this very dynamic and uncertain environment.

The right of members of the IMF to adopt flexible exchange arrangements must be tempered by due regard to each member's international responsibilities. It is only by recognising our individual responsibilities that we can continue to have a flourishing world which grows because free trade and international monetary stability are available. It is of considerable importance in this context that the IMF will be obliged to exercise firm surveillance over the exchange rate policies of members, particularly with the object of ensuring the avoidance of exchange rate manipulation. The effective operation of this system will require vigilance by all members and, of course, a very special responsibility will fall on the larger countries in the IMF because of the weighting they have in world trade and monetary matters. They will have all responsibility to ensure the safeguarding of their common interest.

The evidence of the past six years, despite the impact of the oil crisis and a severe international recession, is that there has been little resort to exchange or trade restrictions. This gives one reason to believe that there is today a much greater appreciation of global interdependence than heretofore and, therefore, a greater willingness to pool some sovereignty in a spirit of international co-operation.

The amendment to the IMF articles does not require any change in our existing exchange rate policy. However, as was to be expected, a number of Deputies used this debate to discuss this topic and particularly our relationship with the £ sterling. I have stated on several occasions that the policy of maintaining the 1-for-1 relationship between the Irish £ and the £ sterling is kept under continuous review, in particular with regard to the appropriateness of achieving our own economic policy objectives. But to imagine that breaking the link with sterling would be an easy solution to our problem would be indeed a very dangerous illusion. I do not think anybody has that illusion. I would not want anybody to interpret my remarks as inferring that I thought Deputy Halligan suffered from that illusion because I do not think he does for one moment.

It is true that our present exchange arrangements put constraints on the policy options open to this country in the monetary sphere and entail acceptance of an inflation rate which in the long run cannot deviate from the United Kingdom rate to any large extent. It must be recognised, however, that inflation would not be eliminated just by breaking the link with sterling, nor would our economic ills be cured by severing the link with sterling.

Until domestic sources of inflation are brought under control, and seen to be brought under control, a change in the exchange rate arrangements would not benefit this country. In the modern world if Ireland were to decide to float free from sterling we would have to link to another currency or basket of currencies. There would be little stability for Irish trade. We need a certain amount of stability even in an unstable world. We need as much stability as we can get in our international trade and there would not be much for a country that had a currency bobbing around on the oceans of the world like a cork. I am afraid that would be the position of a country with a comparatively small economy, as has happened when countries in a position not dissimilar to ours have put a value on their currency which related to their overall trade pattern with other countries. Therefore, we would not be completely free agents in this field.

We might well put a value on our currency related to our trading operations but that would not be the ultimate factor which would determine the value to be put on our currency; it would be the view of the markets, the view of the world. Sometimes I have felt a certain sense of frustration at IMF meetings where serious decisions were being taken by Ministers for Finance, governors of central banks, individual experts, international experts and experts of the system itself. Sometimes as those momentous decisions were being taken in reputable international institutions much greater decisions were being taken in the free markets of the world, by the businessmen of the world lifting their telephones and arranging the sale of currencies across the markets of the world. Indeed, even while we are asleep in Europe exchanges are open in the United States of America and, when the American has gone to bed, we have not yet got up and the exchange markets of the world are operating in the Far East. Therefore, there is a perpetual momentum in currency matters, in commodity prices, in all the factors that influence trade and commerce throughout the world. It is a never-ending process. As we close down for Christian festivals others are working in Islam and, when Islam is closed, the Christian world is still operating.

The world never stands still in economic or currency matters. One cannot determine them by simple rules and regulations in an international organisation, still less in a small country on its own determining the value which other countries may put on its currency. I would not wish to have arise the situation that arose in relation to another country not so long ago, a country much wealthier than ours, which severed the long link it had with the American dollar and put a certain value on its currency. In a very short time indeed that currency sank by over 25 per cent.

Therefore, it is not a decision one takes lightly. I do not think Deputy Halligan suggests that it should be taken lightly. I know he has given this problem very earnest consideration. I would agree with him that it is improbable that on every occasion during the last 150 years on which the Irish £ was in the Snake with the £ sterling it was right for us to be there. I am sure there were occasions when we might have done better to break out, that there might have been occasions when, had we broken out, we might have done better; we might also have done worse. One must look at the situation and consider how it might operate as of now and in the future. Even though it might provide some consolation in dealing with short-term difficulties, because of the sense of patriotism which might be evoked if we called on Irish people to defend the value of the Irish £— because we would be called upon to defend it against the world, the world with which we want to trade—if we decided to be away on our own one could not be entirely happy that that sense of loyalty to the Irish £ would last for a sufficiently long period to enable us to establish a value on the £ suitable to Irish economic circumstances. I am not opposed in principle —and there are circumstances in which I would not at all be opposed in practice, in which I would be quite ready in practice—to make a change. But let us remember this, if we ever make the change we will be put to the pin of our collar to defend it, and defend it we will have to because there will be nobody around the world ready to defend an unrealistic value we might put on our own currency. If we behaved in a sensible way—and this would call for a greater degree of discipline than we have been wont to keep in the past —we would have to do so not merely for a matter of months but for some years. But, having done so—and it is possible; this is as Deputy Halligan sees it—if we succeeded some of the difficulties with which, willy-nilly, we have to live at present might tend to be lessened. Certainly they would not be forever behind us because we live in such a continuing changing and challenging world and we have a very open economy, one which I heard recently described as being like a rural sheebeen, always small and open.

Question put and agreed to.