§ 10.3 p.m.
§ Mr. Nigel Lawson (Blaby)
On a point of order, Mr. Deputy Speaker. I see that the Treasury Minister has now appeared. I could not see him before, and I wondered whether we should have a suspension until the Minister of State found time to be here.
I beg to move,That an humble Address be presented to Her Majesty, praying that the Fiduciary Note Issue (Extension of Period) Order 1978 (S.I., 1978, No. 224), dated 16th February 1978, a copy of which was laid before this House on 21st February, be annulled.If the motion were to be carried and the order were annulled, the fiduciary note issue—which, to all intents and purposes, means the totality of bank notes at present in issue—would have to be reduced at a stroke from its present total of well over £7 billion to precisely £1,575 million. Since that might lead to one or two practical difficulties, I shall not be advising my hon. Friends to support the motion in the Division Lobby tonight. But this order and its predecessors and successors under the Currency and Bank Notes Act 1954, which come before the House every other year, provide the only opportunity in the entire parliamentary calendar which is set aside for the discussion of a subject of the first importance, namely, the monetary policy of Her Majesty's Government. That is part of our purpose in initiating the debate, as indeed Parliament clearly intended. For, as I reminded the House when initiating a debate on the immediate predecessor of this order two years ago, at a far less 165 civilised hour—one is grateful for small mercies—
§ Mr. Lawson
Still, on this occasion we have with us the right hon. Member for Down, South (Mr. Powell), whose presence is a great asset. That alone adds lustre to our proceedings.
When we debated the predecessor order two years ago, I pointed out that the Financial Secretary who steered the 1954 Currency and Bank Notes Act on to the statute book, my right hon. and noble Friend Lord Boyd-Carpenter, as he now is, had explained the purpose of these biennial orders in the following terms:an Order of this kind may give a considerable opportunity for debate in either House, not with the intention of solemnly reducing the size of the fiduciary issue by an arbitrary act, but to allow analysis of the policy—in this case monetary—of the Government. That would be most conveniently effected on this Order."—[Official Report, 26th January 1954; Vol 522, c. 1691.]The phrase "a considerable opportunity" is, to say the least, a considerable exaggeration. But I suppose that it is better than nothing.
I said that examination of the Government's monetary policy was part of our purpose tonight. The other part is also central to the order, for the order is the last vestige, the last pathetic reminder, as it were, of what was once a real measure of parliamentary surveillance and even control of monetary policy. Therefore, in my brief remarks I shall also put forward some suggestions as to how Parliament might, and in my opinion should, regain a central role in this process. For now that it is once again agreed throughout the House that monetary policy is a matter of the first importance, it is surely right and indeed necessary that Parliament should get in on the act.
When we discussed the 1976 predecessor of this order in the small hours of the morning it was the first such order to have been debated since 1962. Therefore, I felt obliged to say something about the fiduciary note issue as such and its relation to monetary policy, as did the Financial Secretary when he wound up the debate. I hope that tonight, in order 166 to save the time of the House, we can all dispense with that.
However, it is worth noting the progress that has been made since then. In particular, in our last debate, on 31st March 1976, I and a number of other hon. Members urged the Government to announce target figures for the growth in the money supply, as was already the practice in the United States. The Financial Secretary, who replied on behalf of the Government, was decidedly un-enthusiastic at the time, objecting that our system was different from that of the United States and that in any case the present Government had no fixed rules for their monetary objective.
Well, we now have precise and publicly announced monetary targets. That at least is some progress. Indeed, the the Bank of England in its Quarterly Bulletin last July described the adoption of published monetary targets asa major step in the evolution of monetary policyIt is an innovation that I am sure is here to stay. We are all practical monetarists now.
But a monetary target is one thing. Adhering to it is quite another. There are worrying signs that monetary growth at present is running well above the target of 9 per cent, to 13 per cent, officially set for the year to April 1978 and, indeed, tending to accelerate. To be precise, the annual rate of growth of sterling M3 for the nine months for which we have figures so far has been running at 14¾ per cent., and for the most recent three months has been 16½ per cent.
That is certainly consistent with wage earnings rising at around 15 per cent, but is emphatically not compatible with the maintenance of single figure inflation, let alone the steady reduction in the rate of inflation that should be the Government's aim. I know that the Minister will claim that the money supply rose still more rapidly in 1972 and 1973. Indeed, that was something that I publicly criticised in the Press at the time. I was not a Member then.
But let me make three points in this context. First, even if that were so, it is no reason whatever to show unconcern at the acceleration of monetary growth now. Secondly, the excessive monetary growth of 1972 and 1973 was the result 167 of an explosion in bank lending to the private sector in response to the upsurge in the demand for credit by private industry. The prolonged recession of the past four years, by contrast, has meant that no such demand for credit has so far arisen during the lifetime of the present Government. In short, the Chancellor of the Exchequer and the Prime Minister are rather like a pair of ageing spinsters who, never having once received a proposition from a member of the opposite sex, now piously parade their virtue.
Thirdly, it is worth pointing out that the 16½ per cent, annual rate of growth of sterling M3 over the last three-month period is in fact marginally higher than the comparable rate which the present Government inherited when they took office in March 1974.
So the first question I ask the Minister is, what do the Government propose to do to bring the level of monetary growth back within the target range and, still more important, to prevent the acceleration which now threatens? Indeed, since I always like to be helpful, perhaps I can provide the answer as well—at least offer one which, I hope, the Minister of State will accept in the spirit in which it is given.
The prime cause of the recent upsurge in the money supply is the capital inflows caused largely by the continuing weakness of the dollar. Let the Government, therefore, offset this inflow by allowing a corresponding outflow of capital through a relaxation of exchange control. That, at any rate, is my suggestion and I hope that the Minister will accept it on behalf of the Government.
My second question is, does he or does he not accept that inflation will be wrung out of the system and financial stability achieved only if monetary growth is gradually reduced over a number of years to a figure consonant with the real growth of productive capacity of the economy? If he does accept that, does not he agree that it follows that next year's monetary targets—presumably to be announced in next month's Budget on 11th April—must be at the very least lower than this year's outturn? I hope he will answer that.
We learn from the Press that the idea is that next year we are to have what are 168 now known as "rolling targets". In his excellent Mais lecture last month, the Governor of the Bank of England acknowledged thatsome people fear that a move to rolling targets would permit much greater elasticity, so that over a period monetary growth could drift further and further away from a desirable medium-term trend.I share those fears. The Governor does not. He expressed the hope that this would not happen. But I am afraid that in an election year I do not share his confidence.
Finally, let me turn to the vital question of parliamentary control. Clearly the present system embodied in the order is little more than a farce. The important question is what should replace it. In the 1976 predecessor of this debate I said—since I do not normally quote myself I hope that the House will bear with me on this occasion—Parliamentary control over monetary policy means in practice that the policy would be expected to follow certain rules. … Parliament would be asked to approve derogations from these rules in exceptional circumstances." —[Official Report, 31st March 1976; Vol. 908, c. 1515.]The adoption of monetary targets, which has happened since that debate, provides the opportunity to follow just this course. That is to say, in place of the order on the fiduciary note issue the Government could lay before Parliament each year in statutory form the annual monetary target for the coming year. The Bank of England would then, in effect, be charged by Parliament with ensuring that the target was met.
If, during the course of the year, the Government were to take the view that the target ought after all to be exceeded then it would have to come to this House and seek parliamentary approval for an increase in the target. In this way, the reality—and I emphasise the word reality—of monetary policy would at least be subjected to genuine parliamentary scrutiny and debate. Any temptation on the part of the Government to pursue an unsound monetary policy would be tempered by the knowledge that their intentions would have to be revealed to Parliament and through Parliament to the world at large.
This is one important way in which Parliament can be brought into the act. Another complementary way is through 169 the Select Committee system. As we have already pointed out in that valuable publication "The Right Approach to the Economy" which I am sure the Minister has as bedside reading,as Parliament evolves a more effective structure of select committees—a development which we welcome—there could be opportunities for regular and public contact between the Bank and an appropriate parliamentary committee".There is nothing unusual about that except that it does not happen in this country at present. In the United States the chairman of the Federal Reserve Board is frequently required to justify his monetary policy before a Congressional Committee. I want to see the Governor of the Bank of England in a precisely similar position.
The recreation of a real measure of Parliamentary control over monetary policy is desirable not only in itself, which indeed it is, if monetary policy is as important as most people now agree that it is and if Parliament is to assert itself, as I believe it should. It is also important as the only practical means of reconciling a greater degree of independence for the Bank of England with what might be termed the democratic imperative.
On the question of independence, I agree with the conclusion of Dr. Arthur Burns, the distinguished ex-chairman of the United States Federal Reserve, who stated a few months ago:I would judge it no accident that West Germany and Switzerland, which in recent years also have managed their economy better than most others, happen to have strong and independent monetary authorities like ours".Surely nobody would maintain that the United States, West Germany and Switzerland are not genuine democracies.
The truth of the matter is that it is an illusion to suppose, as is too often supposed in this country, that democracy means discretionary control by the Government of the day. Parliamentary democracy, which is what we have had always adhered to in this country and attempted to export—not always successfully—to the rest of the world, has far more to do with open discussion and parliamentary control.
In case any of this seems like airy-fairy theorising, far removed from the real world, let me quote finally from a well-known former practitioner, the last Governor of the Bank of England, Lord 170 O'Brien, who said in an address last December,I believe there is also a case for governments, that is the executive branches of governments, to share part of their power over central banks and monetary policy with parliaments … This point is particularly relevant for the United Kingdom … I, for one, believe that if the Bank of England were made more directly accountable to Parliament the Bank would, paradoxically, gain a degree of further independence because the Governor would be given a platform which present constitutional arrangements have hitherto denied him.If the present Government are prepared to travel along this route, which would be in the interests of Parliament and of sound monetary policy alike, then they have our blessing. But if this is too much to hope, then it will fall to the next Conservative Government to embark on this course. Happily we do not have long to wait.
§ 10.23 p.m.
§ Mr. J. Enoch Powell (Down, South)
This biennial order and the address that the hon. Member for Blaby (Mr. Lawson) has just moved provide, as he has said, the opportunity too often neglected in the past to review the state of monetary thinking, policy and execution.
I think that the hon. Member for Blaby has been unfairly treated tonight. I was surprised, not to say shocked, when I entered the Chamber to find myself in the sepulchral atmosphere only associated with Adjournment debates. Yet there on the Order Paper, beside his name, were those of colleagues embodying all the financial authority and talent of the Opposition Benches. The names of the right hon. and learned Member for Surrey, East (Sir G. Howe), the Shadow Chancellor himself; the hon. and learned Member for Dover and Deal (Mr. Rees); the hon. Member for Horsham and Crawley (Mr. Hordern); the hon. Member for Cirencester and Tewkesbury (Mr. Ridley)—the choicest names from the financial expertise of the Conservative Party—were arrayed on the Order Paper. I expected, as the mere representative of a small minority party, to have the greatest difficulty in finding a crevice in which to insert my views into the debate.
Yet how deserted was the hon. Member for Blaby. His situation was rendered all the more poignant by the fact that it was his duty to deliver from the Dispatch Box a remarkable commitment 171 of the Conservative Party for the future—a commitment that may be regarded as extremely ill-advised or injudicious, but still a commitment. Indeed, in his conclusion, the hon. Member for Blaby left no doubt that he was authorised to make this declaration at this time of night.
Therefore, we must find consolation against the emptiness of the Chamber in the presence of the serried ranks of financial journalists in the gallery, who have snatched, as though it were a Budget speech, each of the sentences that fell from the hon. Member for Blaby and rushed them to their editors so that comment may appear in the first editions of tomorrow morning's newspapers.
That is enough of some rather heavy, though not perhaps unmerited, irony. On the last occasion of this debate two years ago, when we reinaugurated the custom of debating this order, it was generally observed that the debate was taking place in a fairly novel atmosphere, which prompted me to apply an old saying, namely, that we are all monetarists now. The trend then observed has gone much further and faster in the last two years, till I am beginning to think that it is the story of the sorcerer's apprentice, all too nastily and injudiciously applying lessons imperfectly learned from his master.
Those of us who anticipated Professor Milton Friedman in the doctrines of the relevance of money supply to the phenomenon of inflation were at first delighted to see the Government, first through one spokesman and then through another, voicing these long rejected, not to say despised, doctrines. But delight began to turn to alarm, as in the last year or two the Government have proceeded to announce precise percentage targets for the increase of the money supply, solemnly to confer on these targets with the International Monetary Fund and other illustrious international bodies, and to treat them as levers of financial and economic management. It is as though the fine-tuning, which had been laughed off the stage a few years ago when it was a Keynesian economic exercise, had come back again by another entrance, reurning, as it were from the country, from the right-hand door of the stage, in the era of monetarism.
172 The hon. Member for Blaby carried this matter further still tonight. He thinks that not only should such targets in precise terms be stated by the Government, or be professed as their objective, but that they should be given statutory validity.
This would be mistaken. It would arouse a misapprehension as to the limits of the possibilities of control of the monetary aggregates; and disappointment at the failure to control the aggregates in this way might rebound to the discredit of the general proposition, which I believe to be all-important, namely, that it is the monetary aggregates which determine the course of prices and of inflation.
§ Mr. Lawson
I am interested in the right hon. Gentleman's comments. However, when he says that I was advocating precise monetary targets, I think that the word "precise" might be misinterpreted. What I had in mind was the sort of monetary targets that we have at the moment, which are arranged for a growth of between 9 per cent, and 13 per cent. I am not suggesting that a precise figure should be announced, from which there could be no deviation one way or the other.
§ Mr. Powell
I am obliged for the explanation. So the incoming Conservative Government, should there be one, will provide the legislative framework—presumably in its first Finance Bill-within which a statutory order or some instrument under that legislation would be laid before the House, prescribing the maxima and minima within which, during the coming 12 months, the growth of the money supply, however determined—it will be fascinating to see a statutory definition of "money supply"—is to be kept.
There are many reasons why I believe that this appearance of possible exactitude in the prediction and attainment of a certain increase in the money supply is foredoomed to disappoint.
There is of course the evident fact that the basic datum in the control of the money supply—the public sector borrowing requirement—is itself a difficult figure accurately to judge. We have in recent years seen the Government's estimates falsified—sometimes upwards, at other times downwards—by sums as large as 173 £2,000 million, and rumour in the financial pages has it that the shortfall may be even greater when we reach the end of the current financial year. If the basic datum—the PSBR—is subject to fluctuations of that magnitude it seems unlikely that anything which is built upon it can be free from at least that degree of uncertainty.
But this uncertainty is multiplied by another, and that is the other operative factor—namely, the success or otherwise of the Government in meeting their borrowing requirement in non-inflationary ways without borrowing from the banking system. The potentialities here cannot be precisely estimated over even a much shorter time ahead than 12 months.
So we have these twin uncertainties, which, married together, are the basis for estimating the growth in the money suply during the coming period. I do not believe that on a basis like that one dare or should erect a statutory requirement to remain within precise percentage limits, even though the distance between them might cautiously be fixed rather wide.
There is a third uncertainty—that is, the time lag between the movement of the monetary aggregate of money supply and its final effect—its residual effect—in terms of prices and the value of money. Many estimates have been made—some far too precise—of the time lag that might be anticipated between a given rise in the money supply and a given fall in the value of money; but experience, I think, can only lead us to the conclusion, after watching these figures over, now, about two decades, that time lag there is, but that the time lag itself is variable and unpredictable. He would be a bold man who would be more precise than to say that it may be somewhere around two years on average.
These being the basic uncertainties which surround the whole matter of the estimating and control of the money supply, I counsel that the idea of fine-tuning should remain in the limbo to which it has been consigned. I have been alarmed to hear the Chancellor of the Exchequer himself talking, in relation to future growth of money supply, in terms of objectives which I fear were dangerously optimistic in their precision. All we can say is that we understand—I hope 174 —the main causes which contribute to the growth of the money supply and we understand, and sometimes even admit, that the growth lies at least preponderantly—I would say uniquely—at the root of inflation.
The deduction from this is that we should attend jealously to the fundamental datum to which I referred earlier, namely, the public sector borrowing requirement, without an excess of which neither the pyramid of increased money supply nor the inflation which caps it could occur.
In the assessment of this fundamental figure, the public sector borrowing requirement, as it is at present used in economic and financial debate, there are at least two serious deficiencies; and I want to take the opportunity of the debate to take a little further a discussion between the Chief Secretary and myself which started in an exchange during Question Time in December.
The Chief Secretary had been talking about the net borrowing requirement and I asked him whether his estimate of it included the cost of increasing our reserves. I was astonished that the Chief Secretary, a man of quick perception as well as deep knowledge of these matters, appeared to be taken by surprise. He said:I am not quite sure what the right hon. Gentleman means by 'the cost'. Does he mean the interest rates? Perhaps he will explain a little further.I acceded as briefly as possible, within the limitations of Question Time, and, unusually, got a second supplementary question by responding to the right hon. Gentleman's invitation. I said:I mean the sterling that we have to pay in order to be balanced by the increase in our reserves.Even this did not seem to help the right hon. Gentleman. He said:To be honest, I do not normally find the right hon. Gentleman as confused as that, but I am not at all clear what that has to do with the PSBR."—[Official Report, 8th December 1977; Vol. 940, c. 1638.]That brings me to my point. The cost of increasing our reserves—the cost of buying-in foreign currencies for sterling in order to manipulate the exchange rate, of which a concomitant is an increase in our reserves—has a great deal to do with the public sector borrowing requirement in the full sense of that term; for it 175 increases the cash requirements of the Government in any given period of time. I am glad that, in subsequent correspondence, the Chief Secretary admitted this fact. He said:You were of course"—what a wonderful phrase "of course" is—indispensable to civil servants drafting ministerial replies. Here was the Chief Secretary, who had found me more confused than usual, writing to me on 20th December, 12 days later and saying:You were of course quite right in saying that foreign currency has to be bought for the reserves, and the sterling with which to buy it has to be borrowed.Exactly. So here is a borrowing requirement of the Government—which can be a huge one if big sums are being added to thereserves at periods when sterling is what is strangely called "strong"—which does not feature at all in the estimates of the PSBR or in the arguments and deductions which are based upon it.
So I take the opportunity of this debate to repeat that not merely our control but our discussion of money supply is severely hampered if the PSBR for the purposes of that discussion does not include retrospectively and—if we are to make estimates—prospectively the cost—positive or negative, for it can be negative when the reserves are rising—of rigging the exchange rate, by increasing or reducing our reserves of currency.
There is another absentee, much to be deplored, from the total which makes up the PSBR. That, too, I brought to the attention of the Chief Secretary who, in the same letter as I have quoted, acknowledged its importance.
The redemption of maturing debt—he admitted—including that of nationalised industries as well as Government debt proper, also necessitates borrowing.So there is another borrowing element which increases the Government's cash requirements in a particular period of time and has to be added to the total that they are seeking to borrow, which accordingly brings with it the possibility, the danger, the probability, however one may assess it, of an increase in the money supply through that borrowing being met from the banks.
176 It was in this debate two years ago that I suggested that this is another magnitude which should be included in estimates of the PSBR. There is a great deal of mumbo-jumbo about the Government's transactions in the money market. There has been hitherto a kind of secrecy and mystique—exceeding that which surrounds the gestation period of the Chancellor of the Exchequer before a Budget—about what the Government are trying to do in the money market: what the sums really are that they are trying to borrow and how those necessities arise I see no reason why the Government should not indicate to Parliament at the beginning of a financial year the quantity of maturing debt which they expect will have to be discharged in cash. That is just as important a figure and no more difficult to estimate than the other items entering into the PSBR and the other factors which will determine the growth of the money supply.
So my plea this year is that, since the PSBR is the one thing we can get hold of—it is the one accessible magnitude in this whole business of the causation of growth of money supply—we should define it correctly for this purpose. There may be other purposes for which a different definition of the PSBR is appropriate; but if we are talking about the money supply, if we are talking about the PSBR as the generator of growth of the money supply, it must be the total, the gross borrowing requirement of the Government at which we look. I see that the hon. Member for Blaby is dissenting, which only shows how important it is that we should take full opportunity of these debates and have a full chorus in order to debate these profound and important matters more thoroughly than is possible, if not in a duet, at any rate in the trio that is to be sung tonight. At any rate, I have concluded my contribution to the part-song, with the adjuration that we should always use the gross total borrowing requirement of the Government as estimated from time to time, and that the Government, while pursuing control of total expenditure, total monetary requirements, so as to leave it within its own power either to increase the money supply or not, should eschew objectives which are so precise in their expression and nature that they give the public a misleading notion of the limits of what is practicable.
§ 10.46 p.m.
§ Mr. Anthony Kershaw (Stroud)
I am sorry that the right hon. Member for Down, South (Mr. Powell) should feel so aggrieved that the whole of the Opposition—and probably the Government—Front Bench are not here to hear him. I did not expect them to be here so I feel no embarrassment.
The proposal made by my hon. Friend the Member for Blaby (Mr. Lawson) that arrangements should be made for the Governor of the Bank of England to have regular opportunities to appear before a Committee of the House, and before the public, to explain his opinion of monetary policies would be wholly beneficial to the conduct of our business.
Of course, the Governor's opinions would not be binding upon any Government. That would not be acceptable to our system. But the argument in public of these complicated matters, which the public understand with difficulty, would be wholly advantageous to the conduct of our business. It would certainly make the public more aware of the problems and perhaps the business community in particular would have more confidence in the policies of the Government of the day. I hope that the Minister will respond to this suggestion.
§ 10.48 p.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
As he did two years ago, the hon. Member for Blaby (Mr. Lawson) explained the purpose of the order and made it clear that he did not wish to vote against it. He said that the total volume of notes in circulation if the order was annulled would have to be reduced from the present £7,800 million to £1,575 million and that the purpose of praying against the order was to have a debate on monetary policy.
The hon. Member then said some interesting and startling things about the Opposition's policy. He gave a commitment, which the right hon. Member for Down, South (Mr. Powell) mentioned. By using spurious figures, the hon. Member for Blaby said that monetary growth was out of control. He based his argument—if it could be called an argument—on the January money supply figures. The hon. Member knows that these were higher than the trend that one would expect for a 9 per cent, to 13 per cent, target.
178 The hon. Member also knows the reasons for this. It was partly because of the tax rebates coming through, partly as a result of inflows and partly as a result of the weakness of the dollar—which is part of the external inflow problem. The hon. Member fell into the trap for which the right hon. Member for Down, South criticised him. He fell into the trap of looking at one month's figures and seeking to reach all kinds of conclusions from them. He fell into the trap of turning monetarism into the kind of fine-tuning that has been criticised in the case of Keynesian management.
§ Mr. Lawson
This has nothing to do with fine-tuning. I did not base my argument on one month. The Minister of State gave me a Written Answer on 6th March which showed that, whether one takes the three months, six months or nine months to December, thus leaving aside the January figures, the rate of growth of sterling M3 on an annual basis, seasonally adjusted, was well above the 9 per cent, to 13 per cent, limit. There is no point in the Minister of State's saying that I used only the January figures. They were special, but the argument applies if those figures are left out.
§ Mr. Davies
The figures that the hon. Gentleman used were based on the figures for April 1977, which was in the banking year 1976–77. The figures are, therefore, quite meaningless in terms of the discussion of monetary growth in the banking year 1977–78.
I feel sorry for the hon. Gentleman. He has for a long time advocated monetarism, but he has had little support from his right hon. and hon. Friends. In Government they paid very little heed to monetarism. In Opposition, it seems, they have left him entirely on his own on the Front Bench to pronounce a very important policy statement. They have completely deserted him, so that one wonders what part monetarism still plays in the higher councils of the Conservative Party. I pay tribute to the hon. Gentleman because he has stuck to his line inside and outside the House, and I am sorry that his colleagues do not support him.
The hon. Gentleman said that next year they wanted a reduction in the monetary targets, but he never mentioned fiscal policy. A few weeks ago we debated 179 an Opposition motion calling for substantial and continuing reductions in direct taxation. That is a fair motion. It was signed by the hon. Member for Blaby as well as by the right hon and learned Member for Surrey, East (Sir G. Howe). If the Opposition are so serious about monetary policy, how can they possibly table a motion relating to direct taxation without mentioning monetary policy? They are falling into the trap of thinking that monetarism is quite separate from fiscal policy, whereas the two have to pull together.
The hon. Gentleman made a further pronouncement, saying that he and his right hon. and hon. Friends wanted greater parliamentary control of the monetary targets or of monetarism, I am not quite sure. Then he asked for a statutory target on monetary growth. The right hon. Member for Down, South dealt very effectively with that ridiculous suggestion. These are not matters that can be put into statute. A certain amount of precision is needed in statute. One cannot have a vague statutory provision in this area. Once too rigid a precision is introduced the problems of fine-tuning and the difficulties mentioned by the right hon. Gentleman arise. As far as I am aware, no country in the Western world has this kind of statutory backing or statutory control over its monetary targets.
The hon. Gentleman said that he wanted a debate on the Bank of England monetary policy. The Bank of England, of itself, does not have a monetary policy. The constitutional position is clear. Monetary policy is the responsibility of the Government. The Bank of England advises the Government on monetary matters, and my right hon. Friend the Chancellor takes very full account of the Bank's views. But I do not think it right to try to compare the Bank with the Federal Reserve or with the German Bundesbank, both of which have their own monetary policies under their respective constitutional arrangements. Our arrangements are quite different. I do not believe that we can go down that particular road.
As far as I could see, the hon. Member was arguing that democracy is all very well provided that we take the control of money out of the hands of the people.
180 People may control other things, but when it comes down to the control of money, which goes to the heart of economic management, that is to be taken out of the hands of the people and put into some other institution.
§ Mr. Lawson
This is a very foolish argument, which the Minister has made on previous occasions, I think, in Committee. I hoped that I had dealt with it adequately. I addressed myself specifically to the point about democracy, but is the Minister really seriously saying that the United States, West Germany and Switzerland are not democracies? If he is not saying that, he should withdraw his suggestion that what I am saying in any way derogates from democracy or democratic control.
§ Mr. Davies
I have no wish to indulge in a debate with the hon. Member about what democracy means. But the American constitution is quite different. It was drawn up at a different time, and and there was a deliberate attempt to put monetary control outside the Executive, the legislature, and to create a fourth arm of government which was outside the control of those bodies.
The hon. Member may think that that is a good thing. I do not believe that it is. I believe that these matters should be debated in the democratic forum of the people, and that the people should have control over monetary matters. As I see it, the hon. Member was suggesting, on the one hand, that we must have a statute, which I think is quite unrealistic, and, on the other hand, that the Bank of England should be independent in these matters. I do not see how the hon. Member can have both of those things. Again, it is the kind of confusion that is at the heart of Tory monetary policy which we have seen in the past.
The right hon. Member for Down, South made the very fair point that there is a possibility, if we rely too much on targets, and too much on monthly figures—he did not say that—that we shall fall back into a kind of fine-tuning danger that is involved in a more Keynesian control of the economy.
The right hon. Member also raised the point regarding the public sector borrowing requirement. To some extent, it is a matter of the definition of the PSBR. I do 181 not want to follow the right hon. Gentleman along those lines. However, he is quite right when he says that if foreign currency is taken into the reserves, this has an effect on sterling M3, certainly. If we repay our debts not out of the reserves but through intervention, that will have an effect upon our M3 targets and upon the level of M3.
Therefore, to that extent I certainly agree with the right hon. Gentleman that transactions in the foreign exchange markets have an effect upon money supply. Whether one goes further and redefines the PSBR to take account of that is another matter, and, I suggest, a subsidiary and secondary matter, and perhaps not as important as the realisation that operations in the foreign exchange market can have an effect upon the PSBR.
As I pointed out in reference to the January figures, the weakness of the dollar, for instance, had some effect upon sterling M3 for that month. Again, inflows as a result of a balance of payments surplus can have an effect upon M3.
The hon. Member for Blaby said that we could solve those problems by abolishing exchange control. I am not so sure about that. But that is another argument.
I hope that I have tried to deal with some of the points that have been raised. I certainly reject the commitment of the hon. Member for Blaby and the Tory Party now, it seems, to a statutory target for monetary growth. I think that that is foolish and silly. It ignores other areas of economic management, and I do not believe that it is really practical. I wonder whether the hon. Member was serious in putting it forward. But it seems now to be a commitment on the part of the Conservative Party.
The hon. Member said that he would not vote against the order. For obvious reasons, it is a technical order that does not in itself affect the money supply. But I recognise that the House wishes to have this kind of debate, and I hope that the order will now be accepted.
§ Motion, by leave, withdrawn.