HC Deb 12 July 1984 vol 63 cc1344-6
4. Mr. Norman Atkinson

asked the Chancellor of the Exchequer if he will define the relationship between money supply and the rate of inflation.

Mr. Lawson

Experience throughout the world has shown there can be no reduction in inflation without a reduction in the rate of growth of the money supply.

Mr. Atkinson

If money supply reflects the level of demand and both the Chancellor and the Treasury are now saying that inflation is not demand led, but is indeed wage pushed, is not money supply, in the opinion of the Chancellor, merely a barometer? Surely the Chancellor himself does not believe that by adjusting the barometer he can change the weather.

Mr. Lawson

If, as I understand it, the hon. Gentleman is treasurer of the Labour party, I am not surprised that that party has gone bust.

Picking on just one of the hon. Gentleman's errors, it is not at all the position of the Government that inflation is caused by wage push. That is the position of the Opposition Front Bench. The Government's position is that what wage push causes is unemployment, and that is one of our main problems today.

Mr. Dorrell

As my right hon. Friend said that one of the indicators that give him an idea of the monetary conditions in the economy is the foreign exchange rate, does he not think that the fluctuations of recent days in the foreign exchange market reinforce the case for Britain joining the European monetary system?

Mr. Lawson

There are always likely to be fluctuations in the foreign exchange market. The biggest fluctuation in recent weeks and months—indeed over a little longer—has been between the dollar on the one hand and other currencies, European currencies in particular, on the other. That would in no way be affected by joining the EMS.

If one looks at the key currency of the EMS, the deutschmark, which is the linchpin, one can see that during the five years that the Government have been in office the value of sterling against the deutschmark has declined by 5 per cent., whereas during the five years that the Labour party was in office it declined by 36 per cent.

Mr. Wrigglesworth

Does the Chancellor remember claiming that the low interest rates that obtained were a result of his successful economic policies in keeping the public sector borrowing requirement down and stopping crowding out? Will he now accept responsibility for the increase in interest rates, or will he accept that he got it wrong before and that factors other than those of which the Government tried to convince the country affect interest rates?

Mr. Lawson

I have always made it clear that there are a number of factors. It behoves us to control those factors that are within our control. But there has still been a considerable change. When the Government of which the hon. Gentleman was then a supporter left office, British interest rates were 4 per cent. above American rates, and, indeed, that sort of difference has been the historical norm. Today, despite the recent rise in British interest rates, which I regret, they are still marginally below American rates as against the 4 per cent. above when the Labour party left office.

Mr. Yeo

Will my right hon. Friend make it clear that the one thing that is under the control of this Government is the relative level of interest rates against international rates, and particularly North American rates? Does he agree that, without responsible control of the monetary aggregates of this country, interest rates would be much higher than they are in the United States? Does he further agree that if we were to follow the spendthrift policies advocated by the Labour party and the Alliance, we would face interest rates of close to 20 per cent.?

Mr. Lawson

My hon. Friend is right. If the Labour party's policies were put into operation they would cause us to suffer much higher interest rates than those that we have today. That is not to say that I welcome the present level; I do not. It is higher than is justified by monetary conditions in this country, and I hope that it will not last long.

Mr. Robert Sheldon

Is not the Chancellor's optimism a little misplaced here, given that the earlier exchange rate and interest rate crises under this Government took place against a background of rising North Sea oil output and rising demand for oil and this crisis is taking place against a background of prospective falling North Sea output and falling North Sea oil demand?

Mr. Lawson

This is in no sense a crisis. While I regret the present level of interest rates, which incidentally are still lower than they were for a large part of the Labour Government's period in office, there has been one important development. In the past a level of this sort presented a severe burden to business and industry. Today, however, there has been such a substantial improvement in company liquidity and profitability that, although this is a disappointment to British industry, it will not affect it anything like as much.