§ [Relevant document: First Report from the Treasury and Civil Service Committee on the Role of the Bank of England (House of Commons Paper 98–1 of Session 1993–94]
§ Order for Second Reading read.9.36 am
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
I beg to move, That the Bill be now read a Second time.
I am sure that those who follow the proceedings of the House would take the view that the Bill appears to be a narrow and technical measure, perhaps concerned only with the uninteresting and arcane workings of the Bank of England. However, I hope that consideration of the Bill will be based on the belief that monetary policy is important, not just to the Bank of England but to every citizen.
It is an irony that, while we rightly deal in detail and at length with the technicalities of taxation policy and look at the way in which, for the sake of argument, the increase in taxation on fuel may be mitigated by compensation schemes, the enormous importance of interest rates to our fellow citizens is not often debated in the House. Certainly it is not subject to detailed parliamentary control.
Perhaps we could think for a moment about the effect of interest rates upon an ordinary family. In recent weeks, much has been made about the increase in taxation that will occur in April. It is said that the average family will suffer an increase in taxation of about £9 a week. Of course that is a serious increase in taxation, but it is one which most families will, with difficulty, be able to contain, perhaps by doing a bit of extra overtime, perhaps by denying themselves some of the luxuries of life. I do not wish to underestimate the strain of that extra taxation, but it is an imposition which is considered in detail by the House.
Monetary policy may have a much greater effect on individual citizens. For instance, we know that, because interest rates have decreased to 5.5 per cent. from their high point of 15 per cent., the mortgage interest payments of an average family with an average mortgage may have dropped by as much as £170 per month. That has been an amazing relief.
On the other hand, when interest rates increased from 7 to 15 per cent., the person who had the average mortgage found, first, that he almost certainly was suffering negative equity in his house and he could not move, and, secondly, that the most important payment that he made every month had about doubled. When that happened, it was not a question of having two or three pints of beer fewer a week or doing a bit of extra overtime; he found that he simply could not meet the payments, and unless he could persuade his clearing bank to lend him a bit more money or to get the building society to roll over the interest for a bit longer, he was in real trouble.
Therefore, monetary policy matters. It matters for every citizen. Even if he lives, for the sake of argument, in a council house, he probably has a young son who is buying a house on mortgage, or a cousin who is struggling with a small business and finding that the small business is being hit by higher interest rates. It is odd, is it not, that the procedures of the House were built up at a time when we 525 were preoccupied with the desire to prevent the monarch from raising taxation without our permission, and yet now the Executive is able to control monetary policy—which I would argue is at least as important to citizens—without our having much control or influence on the way in which it is operated? As a result of the ups and downs of monetary policy in the past 20 or 30 years, there has been increasing interest in finding a better system for creating stability in monetary policy.
The proposals that I make in the Bill are very slight. They do not seek to put the control of monetary policy on a permanent or revolutionary footing. They proceed from a very Tory attitude about the fallibility of individual wisdom; the uncertainty that even apparently wise men have got it right and a belief that it is better to take one tiny, moderate step in the right direction than to take a large number of steps, most of which may be in the wrong direction. The detailed proposals are very modest indeed.
Hon. Members must know that in 1946 the Bank of England was nationalised. That measure was supported by all sections of the House of Commons at the time. Many people, such as Mr. Macmillan and Robert Boothby, felt that during the 1930s the Bank of England had imposed on the country too stringent a monetary policy, and that the independent Bank of England had made the slump deeper and more ferocious than it might otherwise have been. They hoped in the post-war settlement to gain political control over the Bank. That view was, of course, much supported by the Labour party, which felt that there had been a banker's ramp in the 1930s.
One of the more important parts of the Bank of England Act 1946 was section 4, which gave the Treasury the general power to give directions to the Bank of England. My Bill, by clause 1, amends the 1946 Act to provide that subsection (1) of section 4 shall cease to have effect; but in its place is clause 2, by which the primary objective of the amendment Bill will be to impose upon the Bank the dutyto formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.To that end, by clause 3,The Treasury shall, after consultation with the Governor, set policy targets for the carrying out by the Bank of its primary objective.That means that if, for the sake of argument, there is general inflation of 11 per cent., it will not be suggested by the policy targets that it is possible to achieve sound money within a year—it is not politically possible and socially possible to do so. Of course it would be perfectly possible economically. If there were a general interest rate of 25 per cent., no doubt one could achieve price stability in six months or a year, but the social and economic consequences of that squeeze would be horrifying. The targets would, therefore, be agreed between the Governor of the Bank, taking into account its statutory obligation to achieve stability in the general level of prices, and the Chancellor of the Exchequer.
Then, by clause 3, once that policy objective had been agreed, the policy would be recorded in writing. The details of the policy would be tabled at the first meeting of the court of directors of the Bank, and then published in the 526 London Gazette. It would mean that everyone could follow the objectives and the way in which the objectives were implemented.
However, of course, that would not be enough in a parliamentary democracy, and it is laid down by clause 4 that the individual responsible for the implementation of the monetary policy shall be the Governor. He would be personally responsible for the agreement and then carrying out the agreement, but—and that "but" is important—by clause 5 there is an override. It acknowledges that, wherever monetary policy is agreed and implemented, there may be more important considerations than the mere attainment of price stability. We saw how the apparently independent Bundesbank was overridden by its political masters. The monetary terms of the settlement made at the time of the reunification of Germany were not at first to the Bundesbank's liking. The independent Bundesbank was told that it would have to grin and bear it. The politicians decided, quite rightly, that the temporary maintenance of price stability was less important than a generous settlement on reunification.
§ Mr. Budgen
That is a different point. There was no reason for us to have paid for it, in my opinion. I shall deal with that issue later. I am merely explaining the details of the Bill and do not wish, for the moment, to reopen old wounds.
§ Mr. Budgen
I am hoping to reopen old wounds later. At this very moment, I am trying to be helpful and moderate—[HON. MEMBERS: "Very unusual."]—which, as my hon. Friends say, is very unusual.
Under clause 5, the Treasury may, from time to time, lay down a statutory instrument to direct the Bank of Englandto formulate and implement monetary policy for any economic objectiveother than that of price stability. It is an override power which takes account of the argument for public accountability. It deals with the legitimate argument about whether in our democracy, with a sovereign Parliament, we should have something approaching an independent or autonomous central bank.
I now advance the general arguments for granting the Bill a Second Reading.
§ Mr. Malcolm Chisholm (Edinburgh, Leith)
Before the hon. Gentleman proceeds, will he clarify clause 5? I may have missed some details when he went through it, but my query goes to the heart of his argument. Is his suggestion identical to that of the Treasury Select Committee's report, which talks of the power being used temporarily and in exceptional circumstances? It is important that hon. Members know to what extent it is envisaged that such an override power would be used.
§ Mr. Budgen
Clause 5 is based on the Select Committee's recommendations. It is true that the Committee talks of a temporary override, but, as the hon. Gentleman will know, in politics, things that are supposed to be temporary turn out to be quite well established— 527 income tax or, for example, rent control in the 1914–18 war. Under the Bill, the Government would state that the overrride was temporary and, under clause 5, they would have to return to the House every six months to obtain the powers for that override.
Ms Diane Abbot (Hackney, North and Stoke Newington)
§ Mr. Budgen
I shall of course give way to the hon. Lady in a moment.
If the Government wished to do so, they could ask for the powers every six months. For the sake of argument, let us suppose that a Government had been elected with the open promise to create hyper inflation. In such circumstances, they could obtain the necessary powers every six months. As with all measures in our constitution, there is no element of entrenchment in the Bill. Even if the House agreed to my proposals, an incoming Government who wanted to go for growth and get the economy moving —and accepted the consequent advantages and disadvantages—could amend the Bill.
I have listened with interest to the masterful way in which the hon. Gentleman deploys his argument. Will he clarify the way in which the override would work? If any Government told Parliament that they were, in effect, going to let inflation rip, would not their currency drop like a stone?
§ Mr. Budgen
That is true. The currency would, or might, drop like stone. At any rate, the object of the proposals is to achieve openness and ensure that, if a Government say they are going to do one thing, they cannot give directives to the Bank that do something quite different.
We have had two periods of serious inflation in the past 20 years—between 1972 and 1974 and between 1986 and 1988. In both periods, when interest rates were too low they had an advantageous effect on the retail prices index in the short term and enabled the Government of the day to say that they were adamant about trying to control inflation, while creating the monetary conditions that ensured that within 18 months or two years the underlying rate of inflation would pick up substantially. The proposals would not prevent a Government from giving instructions to the Bank to let inflation rip, but if the Government do so, they must do so openly and everyone must understand the consequences.
§ The Financial Secretary to the Treasury (Mr. Stephen Dorrell)
If my reading of the Bill is correct, I think that my hon. Friend might be understating the extent to which the Bill would entrench the—to my mind—entirely laudable objective of maintaining price stability. Clause 5 would allow the Treasury to introduce two orders of the type that he describes, but neither may last more than six months. The Treasury would not be allowed to introduce more than two orders within the space of 13 months. Therefore, as I understand it, the Bill would provide that there would be at least one month in any 13 when the overriding objective of clause 2 would not be suspended by the Treasury. It is not something I criticise, but it is important that my hon. Friend deals with that issue.
§ Mr. Budgen
If it is obvious that after the expiry of the month the Government will return to the previous policy, I do not think that the month represents a very large break. 528 I was using the word "entrenchment" in a technical sense. I meant that, because we have no written constitution, we could abolish the provision of the Act—if the Bill becomes an Act—without there being an extra-constitutional impediment to that abolition. I meant that my proposals were different from the entrenched position of, for example, the Bundesbank in a written constitution. That is the sense in which I used the word, and I am sorry if I did not define it properly.
Discussion of the details will, I hope, emphasise the fact that the Bill takes fully into account the necessity for parliamentary accountability in our system. Those of us who support the Bill believe that it would assist the House by providing openness and giving the House the opportunity to criticise what the Executive are doing. It is only by knowledge and by openness that the House has the opportunity to bring its criticism to bear.
For example, during the battle between Lady Thatcher and Lord Lawson, as they are now known, about what occurred and what went wrong in the middle to late 1980s, Lady Thatcher said that when Lord Lawson began the policy of shadowing the deutschmark she, as Prime Minister, did not know that it was being done. She said in her memoirs that she found out only as a result of following the exchange rate policy chronicled in the columns of the financial press.
Whatever the reason for that may have been, if the Prime Minister of the day was not fully informed of the interaction between exchange rate policy and monetary police, how much less was the House of Commons informed? Therefore, I hope that the proposals in the Bill will lead to greater openness in the Treasury and between the Government and Parliament.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
Is not openness at least as important from the point of view of subsequently knowing whether people were informed or not as not allowing them to pretend that they did not know when they did? Is not the account that the hon. Gentleman gives difficult to square with Lord Lawson's comment, which appears in the corrigendum to the second Treasury and Civil Service Select Committee report? He says of himself and Lady Thatcher:Although we had some fairly robust exchanges on a large number of occasions, because she did not like interest rates going up as a general rule, there were only two occasions during the whole of my time as Chancellor in which in the event I did not have my way and interest rates did not go up.That does not suggest that Lady Thatcher did not know.
§ Mr. Budgen
I am not here to stir up ill will over that controversy. One can only say that both proponents will be able to make their case more effectively in future. Previously there was never an open instruction from the Treasury to the Bank of England and, inevitably, there was a good deal of mystery about what was going on. As to the extent to which the mystery was shared between the First Lord of the Treasury and the Chancellor, we shall never really know, but I hope that I was arguing effectively that monetary policy affects every citizen in a most important way. It is extraordinary that we argue in detail about the minutiae of taxation policy while we have no influence whatever over present monetary policy.
I should like to emphasise the importance of ministerial responsibility in our system. Not only is the Executive accountable to a sovereign Parliament, but individual Ministers are personally and collectively responsible and 529 there is nothing in the Bill that undermines the personal responsibility of the Chancellor of the Exchequer for monetary policy. If the override provisions of clause 5 need to be brought into effect, it is clear that the House of Commons will be able to tell the Chancellor of the Exchequer that, regardless of the monetary policy being pursued in response to agreed targets, there are perfectly satisfactory powers under section 5 of the Bank of England (Amendment) Act which will enable him to override those policy targets to produce the monetary conditions appropriate for the state of the economy.
As I explained, I hope that this is a not a revolutionary measure and that there is nothing exciting or interesting in it. I hope that it builds, in a modest fashion, on the practices that have already been adopted between the Bank and the Treasury since the great release of 16 September 1992. The Bank of England now publishes a quarterly inflation report. That may seem to be a relatively unimportant change, but the quarterly bulletin in the past was the subject of most detailed negotiation beween the Bank of England and the Treasury. It was the daily duty of countless persons, each with double firsts in classics, to pore over the exact meaning of particular words so that when a warning was given it could be in language that appeared adequately to rebuke the Government and would send a small message to the market without deeply disturbing it. That was an intellectual game which was thought to be of the greatest importance and certainly employed many of our finest brains for many weeks, months and even years.
Freedom has now been granted to that activity. The inflation report is now drawn up and published by the Bank of England without the preliminary surveillance of the Treasury. It is important to consider the content of the report. It deals with recent price developments, with monetary and fiscal policy, with demand and output, with the labour market, with price dynamics and with prospects for inflation, which are important. Therefore, if the Government were setting too lax monetary targets, which would result in an increase in inflation, the prospects for inflation would have to be set out in the Bank's assessment of the consequences of that too-lax monetary policy. That is an important innovation, since and perhaps as a direct result of, the splendid activities of the speculators on 16 September 1992.
§ Mr. Alistair Darling (Edinburgh, Central)
Does the hon. Gentleman agree that the test of the credibility of the Bank of England's quarterly report will not come until the Bank feels it necessary to fire an overt warning shot over the Government's bows? Suppose that, by the end of this Parliament, the inflation target of 2.5 per cent. that the Chancellor has set himself is not being reached. Does the hon. Gentleman think that the Bank will have the courage, perhaps just before an election, to fire a warning shot? Might it not resort instead to a form of words not dissimilar from that to which the hon. Gentleman has referred?
§ Mr. Budgen
I agree that that is a risk. All constitutional changes that occur in a country that has an unwritten constitution take a little time to bed down. It is very proper that we should move slowly and steadily and by incremental steps, and we may realise the direction in which those incremental steps are taking us only with the value of hindsight. In Stuart times, the judiciary emerged 530 as an independent force. With the advantage of hindsight, it is easy to look back on the various incidents and say that they were all moving in the same direction, but it probably did not appear to people at the time that that was what was happening. Practices get slowly embedded. They get noticed and perhaps applauded; then the chattering classes say that they are a good thing; then, later, the man in the pub may take a transitory interest in them.
It is possible that, at some later stage, pressure will be put on the Bank of England to modify the judgments that it publishes in its quarterly inflation report, and no doubt some consideration will be given by the Bank to the modification of that report, just as in Stuart times some judges no doubt regarded themselves as no more than the handmaiden of the Executive and from time to time did not support the independence of the judiciary. But that will not stop the general trend, which I suggest will lead to more stable monetary policy.
§ Mr. David Willetts (Havant)
Surely the real dilemma is a dilemma within the Bank. If it produces an unfavourable inflation report, its prospects of successfully conducting gilt sales at favourable prices will be jeopardised. That is one reason why many who argue in favour of giving the Bank of England an independent role in monetary policy have suggested that the role of selling Government debt should be taken away from it. Can my hon. Friend explain why that proposal is not in his Bill?
§ Mr. Budgen
My Bill is based on the recommendations of the Treasury Select Committee and on the belief that one small step in the right direction is better than a great number of steps in the wrong direction. Many people will say that this is in any case far too large a matter to be dealt with in a private Member's Bill. [HON. MEMBERS: "Hear, hear."' Some of my hon. Friends have strong views about that. A great many subsidiary issues—for example, the Bank's role in supervising other banks and selling Government debt—may come to the House for consideration in future, but I do not think that it would be necessary or wise for my Bill to deal with those secondary problems. I say that even though I agree that once the Bank becomes more distant—I think that that is a better way of describing it—from the Treasury, many of those issues will arise.
I have dealt with the importance of the quarterly bulletin and its inflation report. A second change has occurred recently—a change in the way in which the Bank implements agreed changes in interest rates. As the House knows, the custom that has grown up is for the Governor of the Bank of England and the Chancellor to meet monthly. In the past, that was often the point at which the Chancellor announced any agreed change in interest rates. A new practice has arisen, however. Now, when there is agreement to change the current rates of interest, the Bank decides when it will announce the change and it has a month in which to do so.
That is important in relation to the Bank's function in managing Government debt, to which my hon. Friend the Member for Havant (Mr. Willetts) referred. If the Chancellor of the day finds that the Government are in a bit of difficulty and there is general pressure to lower interest rates, he may say, "Okay, Governor. We have agreed to lower interest rates by 1 per cent. Whoopee. Let us get it 531 announced as quickly as possible." That may prove very expensive in relation to the sale of Government debt. It may lead to great difficulties in managing the gilts market.
I have referred to two steps in the direction that I hope the House will take by giving the Bill a Second Reading. We ought not to dismiss the growing interest in the country at large in some form of independent or autonomous central bank. Every week brings a new high-powered report suggesting the advantages of such a bank. Most of those reports are based upon the academic interest in fancy foreign institutions, which, it is wrongly believed, can be easily grafted on to our constitution. I should be the last person to say to those who were previously unthinking supporters of the exchange rate mechanism, "Here is another splendid foreign institution. If we get on the bandwagon, there will be a major change for the better in the management of our monetary policy." But those honourable academics who give up much of their spare time to produce influential pamphlets do it because they see that monetary policy has created so much instability in the past 20 years, and perhaps because they do not recognise the overwhelming necessity in our constitution of both ministerial responsibility and parliamentary accountability.
The right hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to the report of the Treasury Select Committee. The Bill is based—I hope accurately—on that Committee's recommendations. It is important to remember that that Committee represents all sections of opinion in the House.
I see the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) in her place. She is a distinguished and vigorous member of that Committee. Hers was the only voice dissenting from our report. She will speak most eloquently for herself I am sure, but I think that she feared that the Committee's recommendations would lead to a British Bundesbank. The hon. Lady nods in agreement, and I certainly do not wish to misrepresent her position. It is true that there are some members of the Treasury Select Committee who would like to see a British Bundesbank, but the last thing in the world that I want is a British Bundesbank.
The proposals that I support are designed to create openness and accountability, but not as a preliminary to a free-standing independent British central bank or, even worse, to a European central bank.
§ Mr. Alan Duncan (Rutland and Melton)
Does my hon. Friend agree that the key to the parallel between the ERM and the gold standard before the war is that it was a Government decision to enter that particular form under the then Chancellor of the Exchequer, Winston Churchill, and it was the Bank which operated within those constraints? The Bank was subsequently criticised for having a too stringent monetary policy. The pre-war decisions and problems about which many people criticise the Bank were set by a political decision of the Government. They were not caused by the Bank and, when they were eased, the situation changed very quickly.
§ Mr. Budgen
When the Bank was independent in the 1930s, it had all the faults of the accumulated tradition of being the spokesman for the City interests. It was a very powerful pressure institution. It did not have its present characteristic of being a servant, albeit a very superior servant, of the Treasury. Therefore, it is not surprising that 532 some politicians agreed with Keynes that Winston Churchill was an outstandingly disastrous Chancellor of the Exchequer. However, they also said that people should consider the rotten advice that the Bank gave to Winston Churchill and the way he, as a very powerful politician, gave way to that even more powerful vested interest. We can understand why, in 1946, many Keynesian Tories felt that the influence of the Bank had been harmful in accentuating the depression in the 1930s.
I want to conclude with two arguments to show why the Bill should receive a Second Reading. If the Bill goes into Committee, I will welcome all suggestions for its improvement. The last thing I want to do is to suggest that the Treasury Select Committee or any other small partial body has a unique wisdom in producing legislation. Indeed, most of the legislation that is bashed through this place in a hurry is disastrous.
In relation to monetary policy, I do not want my Bill to be an example of the wisdom of the Dangerous Dogs Act 1991. If the Bill enters Committee, all suggestions for its improvement, modification and even its scaling down will be considered very carefully. However, I suggest that the Government should allow the Bill to go into Committee for two reasons.
First, if the economy picks up as we all hope it will—and there has been a major relaxation of monetary policy since 16 September 1992, so we are entitled to hope and believe that the economy has picked up and will pick up further—the consumer will save less, spend more and be less inclined to buy Government debt. That means that the deficit of about £1 billion a week will be increasingly funded by foreign holders of sterling, most of whom come from countries that have independent central banks. They will find it very difficult to understand how a Government can say to them on the one hand, "Please lend us £1 billion a week" and on the other, "The last thing we want is a system of more open relations between ourselves and our subordinate, the Bank of England."
Secondly, if the Bill goes into Committee, it will give the Government a splendid opportunity to explain their present thinking about the Maastricht treaty and the move towards a European central bank. I know that the Government will grasp that opportunity. It is interesting to remind ourselves that the Government's position on that matter is still based on their very clear expressions revealed in the Conservative party manifesto issued before the last general election.
I have detained the House for a long time and I do not wish to continue for much longer—
§ Mr. Budgen
Well, if my hon. Friend wishes me to continue, I will remind the House of the clear expression of principle set out in the Conservative party manifesto. It states:But the treaty goes on to say that monetary union will come about automatically in 1999, for all who meet the conditions. We did not want to exclude ourselves from membership; but we could not accept such an automatic commitment. By the end of this decade the EC's membership will have changed; the economic performance of many of its members may have changed. We cannot tell who the members of such a union might be.We therefore secured the freedom to make a proper judgment on events. We are as free to join if we, wish as any other member. We would have to meet the same conditions—no more, no less. 533 We will play our full part in the discussions of the monetary institutions Europe may create in the 1990s. But we are not obliged to join in a single currently if we do not want to.I hestitate to repeat this and I hope that I will not be criticised in private.
§ Madam Deputy Speaker (Dame Janet Fookes)
Order. The hon. Gentleman would be well advised to hesitate. I need to know that his comments relate directly to the terms of the Bill.
§ Mr. Budgen
Indeed they do. The proposals in the Maastricht treaty are, first, for a half-way house to a European central bank and, secondly, by stage 3, the possibility of our joining a system in which there is a single European central bank. That is directly relevant to our consideration of the role of the Bank of England, which is our domestic central bank.
I draw the attention of the House to that section in the Conservative party manifesto because the Government, very properly, have argued against the very limited proposals in my Bill on two grounds. On 16 December, my right hon. and learned Friend the Chancellor of the Exchequer said:We should consider it with care, also taking into account such matters as parliamentary accountability for an increasingly more autonomous Bank of England."—[Official Report, 16 December 1993; Vol. 234, column 1257.]On an earlier occasion, when the Prime Minister was Chancellor of the Exchequer, he said that he was against any form of independence for the Bank of England becausethe man or woman responsible for monetary policy should be available to the House of Commons to answer for his or her policies."—[Official Report, 5 July 1990; vol. 175, column 1110.]Each of those arguments is important and compelling.
I hope that I have persuaded the House that those two general principles should not defeat this very modest measure. But when we apply those two principles to the European Monetary Institute and to the European central bank, we see how extraordinary it is that the Government agreed to the proposals for stage 2 and left open the possibility that we might join stage 3. It is quite obvious that stages 2 and 3 are completely inconsistent with the two arguments of principle that were so properly brought forward by the Government in considering the Bill.
Much has changed in Europe in recent months. We have had the great freedom that has resuscitated our economy and given hope to our people since 16 September 1992. The unfortunate peoples of Europe suffered a terrible setback during the first weekend of 1993, when their exchange rate mechanism was blown out of the water and has been left but a broken shell waiting only to sink. We need an opportunity for the Government to restate their position. We want to know whether, once again, we are to be subordinated to the Bundesbank, and whether, once again, we are to go back into the exchange rate mechanism. We want a bit of openness between the House and the Government.
This is a narrow, consensus Bill based upon, as legislation should be, agreement of a very narrow, carefully defined nature between persons of very different views. It allows the Government, not of course to say, "Sorry for the ERM"—that would be too much—but to explain their changed position.
§ Mr. Budgen
As my hon. Friend reminds me, let us say "Thank you" to the Opposition for their support of the Government over the Maastricht treaty. It would not have been possible for the Government to maintain us within the ERM, to thrust the Maastricht treaty down the throats of the British people, but for the unswerving support of the Opposition parties. It was selfless. Whenever the Government were in difficulty, we always knew that the Opposition would be there. Their support for the social chapter and for the single currency was unswerving. It was the most splendid demonstration of gallant principle that we have seen for a long time.
Perhaps the Government will now look for an opportunity to explain their thinking. We should accept the closure motion, which I am sure will be necessary at the end of the debate, and we should give the Government an opportunity to explain themselves not only to the House but to the British people.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
When the hon. Member for Wolverhampton, South-West (Mr Budgen) waxes so eloquently about the green pastures which he believes we have entered since we left the exchange rate mechanism, he is inclined to forget that our time in it was actually the source of the degree of control of inflation that we have been enjoying in recent months and that, therefore, there are two sides to the story.
Indeed, one of the significant points about the Bill is that it is designed to provide another means of building a bulwark against inflation, which we might need not in the immediate circumstances but in foreseeable circumstances, especially if, by that time, we are still not within any other sort of constraint that effectively links monetary policy to keeping prices stable.
It must be unusual for the hon. Member who has the second slot in the private Member's Bill ballot to be such an enthusiastic supporter of the first Bill in the ballot and quite so keen even for it to be considered in Committee, although, for my own reasons, I hope for only brief Committee proceedings on this nevertheless important Bill. I have energy conservation matters that I know the Government will want to discuss in detail in Committee, and which the same Committee will have to consider as soon as it has disposed of the necessary work on this Bill.
At least the Liberal Democrats cannot be accused of advocating an independent central bank in response to fashion—unless, that is, we are the setters of fashion, which we like to believe we are, because we put that proposal in election manifesto commitments when it was the preserve of only a few. It has taken a spate of ex-Chancellors to give the concept some respectability, which it did not previously enjoy, and dispassionate and careful analysis in a Treasury Select Committee convinced some hon. Members who might initially have been sceptics that we should make moves in that direction.
Our commitment arises, first, from the belief that stable prices should be part of the general framework for economic management. Secondly, we believe that such stability is more likely to be achieved if we have an institution that conducts monetary policy with that sole or primary objective. Thirdly, we believe that such a system would make for greater accountability for monetary policy; at the moment, monetary policy is divided between the Chancellor and the Bank.
535 Fourthly, we believe that the experience of the present system, which was acknowledged by the Bank during questioning by the Select. Committee, is that Chancellors will be influenced in at least the timing of interest rate decisions by such political events as party conferences, hostile debates coming up in the House of Commons, and so on.
Fifthly, we believe that markets are well aware of that fact and will exact an interest rate premium in proportion to their fears about the reliability of anti-inflation policy, so that rates are sometimes higher than they would be if those fears could be removed or reduced.
The evidence that interest rate decisions have been determined by possible events is now in the open. It was the former Chancellor, the right hon. Member for Kingston upon Thames (Mr. Lamont) who said:While my right hon. Friend the Prime Minister and I have been in general agreement on interest rate policy, I do not believe that even the timing of interest rate changes should ever be affected by political considerations. Interest rate changes should never be used to offset some unfavourable political event. To do so undermines the credibility of policy and the credibility of the Chancellor."—[Official Report, 9 June 1993; Vol. 226, c. 284.]Why did he say that? That was not said in an abstract theatre; it was not in an Institute of Economic Affairs pamphlet; it was not in an Adam Smith Institute tract that those words occurred. They occurred in the resignation personal statement of a Chancellor who was reflecting on what had gone wrong while he had been in that position and how much of that was other people's fault rather than his own. He said those things in order to indicate that they happened.
In order to get that statement verified, I put it to the present Governor, who was deputy Governor of the Bank at the time, Mr. Eddie George. I asked:Does your experience confirm that such a warning was necessary?Mr. George said:I think I have to say yes … It is undoubtedly true that there are times when the short-run tactics are adjusted to take account of events which are actually not a lot to do with a monetary policy. In any single incident, in my experience, that can be damaging for a little while. … Provided actually it was not an unreasonable thing to do in a strategic sense, that does not last for very long, but it has a corrosive influence over time. People tend to think that these decisions are made on that basis.What clearer evidence could we have than that? The Chancellor warns that interest rate decisions should not be taken on that basis. The man who was deputy Governor at that time and who is now in charge of the Bank said, "Yes, that is a danger, it does happen, at least in respect of timing, and, because people know that it happens, that fear affects market perceptions about anti-inflation policy." We could not have a better tested case of the dangers.
Of course, the terminology of all that is confusing. Hardly anyone As attempting to introduce into this country a totally independent institution carrying out all the present functions of the Bank on a totally autonomous basis. Nor is it conceivable that we could devise a British clone of the Bundesbank or the "Fed". The term "independent central bank" has become shorthand for various models in which the central bank has allocated to it the operation of monetary policy in pursuit of declared objectives and is then held to account for its effectiveness in carrying out those objectives.
The consensus in the Select Committee was that the remit should be price stability, but that targets, which could take account of other objectives, should be publicly set by the Government, with parliamentary approval. It is 536 arguable that any qualifications of the price stability objective and any use of target mechanisms and "overrides" risks losing a significant part of the increased market confidence and the reliability of the policy. At least the process is explicit and open, and that in itself is a considerable improvement on what we have now. One can imagine that the Government might have some difficulty in winning the political argument for what the Bank thought were weak targets.
If one brings that debate into the open, it becomes much more difficult for the Government to let inflation rip by surreptitious methods or by subterfuge. The slight difference of view over how far one should go has been reflected in the amendments that were tabled in the Committee. I was glad that the Committee accepted a raft of amendments of mine which were supported by the hon. Member for Milton Keynes, South-West (Mr. Legg). Those amendments were then sub-amended in various ways. It was a complicated process, but it arrived at a decision between people of varied points of view but with a shared belief that what we needed was a more open process in which the Bank has a declared objective of stability which is open to some public modification. That is what most people are talking about when they use the shorthand of "independent central bank".
None of that will affect directly the other functions of the central bank. Those include bank supervision, serving as the banker to the Government and safeguarding the health of the banking system. Those in themselves do not require changes in accountability, though there are arguments in favour of hiving off banking supervision to a different institution, a change which people might think necessary.
It has been pointed out that there is a possible danger from the Bank's role as the banker of the Government to its independence in running monetary policy. What will be certainly required by a change to greater autonomy in monetary policy will be a change in the internal structure of the Bank, with a clearly distinct monetary committee. The basis for that requires further discussion, as the Committee acknowledged.
The process is easier to see in federal countries. I know that that term causes some embarrassment to Governments, but many countries run their affairs on a federal basis quite happily. In federal countries, it is easier to see how an element of independence may be drawn from the federal components of a country in forming the monetary committee of one's bank. Despite my support, and that of my party, for a federal system within the United Kingdom, let alone Europe, I do not wish to rely on potential developments, but rather to look for ways of getting the job done here and now. We have to look for ways of making the monetary committee of the Bank an appropriate one for carrying out those tasks.
Let us get rid of two myths. First, in delegating monetary responsibilities to the central bank, Parliament certainly would not be throwing away accountability. Where is the parliamentary accountability now? Even with greater openness, we do not know whether the Chancellor is acting on or rejecting the Bank's advice.
Shared responsibility is the death of accountability. We can see that theme running through all of the stories about accountability in every kind of field, whether it is central banking or arms to Iraq. If several people are responsible, they can all say, "It was not me, it was him … he didn't tell me … he sent me the memo, but I did not fully 537 appreciate its contents." When responsibility is divided, it becomes diffused, and one gets less effective accountability.
§ Mr. Dorrell
I entirely agree with the right hon. Gentleman that shared responsibility means that the exercise of power is unaccountable. That is quite right, but the right hon. Gentleman is wrong in describing our present arrangements as "shared responsibility". It is clear that responsibility for the conduct of monetary policy lies with the Chancellor of the Exchequer. The Chancellor's accountability to the House is the accountability mechanism at present. The problem with what is proposed in the Bill precisely involves the issue to which the hon. Gentleman has referred—responsibility would become more diffused than it is at the moment.
§ Mr. Beith
Up to a point, that is true. The former Chancellor, Lord Lawson, made that point to the Committee in his usual modest way. He said that the policy was that when he believed interest rates should go up, they went up, and when he believed they should go down, they went down. He subsequently qualified that by revealing that, on two occasions, Baroness Thatcher did not let him have his way, but, generally, that was how it was to be.
What the Bank is saying at any one time is crucial to the matter. We do not want to know whether interest rates went up or down, because we know that the Chancellor made the decision. We want to know when he made the decision, and whether the Bank told him to do that, or to do something else. If we do not know that at the time, clearly we cannot understand the nature of the decision and we cannot have a public debate about it. Obviously, that would be destructive to the market perception of what is going on.
We cannot have bankers issuing press releases saying that they are on their way to tell the Chancellor that interest rates should go up, and then the Chancellor does not put the rates up. One can imagine the consequences of that. It is much better to have responsibility lying where the advice comes from. We would then know that, whatever happens, the decision is being taken by the institution that has been charged with working out what the effect will be on price stability. The institution can subsequently be held to account for how far it has achieved price stability by the methods.
There is always the hint that the Chancellor may or may not be acting with the support of the Bank. Under the system that is proposed in the Bill, the Chancellor is answerable to Parliament for the more specific responsibility of setting a target or, for that matter, for whether he is using an override if he chooses to do so. The Bank's carrying out of its duty can be questioned in a Select Committee and debated on the Floor of the House. I believe that it is a myth that, under the proposals, there would be less accountability than there is now. I believe that there would be more, and I have no doubt on that at all.
The second myth is that unemployment would be kept lower if the Government had direct disposal of the instrument of monetary policy. That means that the value of money would be destroyed to meet short-term crises, with the result that property investment and reckless borrowing became more attractive than saving and industrial investment. We have been through all that in the recent experience of the country. That is the route to 538 long-term unemployment and to failure. In the short term, price stability targets can assist by taking account of the need to move at an unmanageable speed to price stability. Big external shocks to the system could justify an override, or a change in the target.
Nobody is suggesting that a system be devised in which it is impossible for monetary policy to take account of something dramatic; for example, the oil shock which hit the world economy. Some of those who like to regard themselves as latter-day Keynesians seem to assume that Keynes would, for precisely those reasons, have no truck with the use of monetary policy. That is quite false. Keynes is recorded by Chamberlain, for example, as arguing for a very long and continuing hike in interest rates in 1920. Even as his views evolved during the later crisis, Keynes never lost a degree of commitment to the use of monetary policy to maintain price stability. He had an overriding concern with the management of demand, but that did not make him someone who would advocate lax monetary policy in the face of raging inflation. It is a total abuse of Keynes when some, including the hon. Member for Dagenham (Mr. Gould), appear to suggest that Keynes might have favoured an extremely lax monetary policy when faced with severe inflation.
Under the proposed system, fiscal policy could not be operated at total war with monetary policy, so both the Government and the Bank will have to take the economic circumstances and each other's decisions into account. Stable money is just one of the building blocks for a stronger economy. An autonomous, but accountable, central bank with responsibility for the conduct of monetary policy is a big step towards stable prices. For much, but not all, of the time, that should enable lower interest rates because of greater market credibility. That is not a panacea for other economic problems, but it leaves the Government free to tackle the problems within a more stable framework.
The hon. Member for Wolverhampton, South-West is well known for his rigorous critique of Britain's participation in anything European. He pointed out that, for many people who take his view, there would be attractions in having an independent central bank in this country, rather than our being involved in a European central bank. I take a different view. I believe in the great merits of a single currency. We can secure the economic conditions to make it feasible, and I believe that it is an appropriate and necessary component of a single market. It would be of great advantage to British industry if it could operate in one market with one currency, and I should like to see that come about.
However, we need that to come about by a different mechanism from the ERM—the ERM is a draughty waiting room in which to stay for a long time. Experience has demonstrated that the final stage of entry into a single currency needs to be a shorter one. We cannot operate a single currency as a nearly-single currency for any length of time, unless there is a commitment from all participants to safeguard each other's currencies. Without that determination, the currencies can be picked off one by one. A change of route will be essential if we are to get a single currency. That is a safe bet, whether one is in favour of a European single currency or opposed to it. The one thing that the two sides of the argument seem to have in common is the determination to build a non-inflationary economy for this country.
539 Whether we do that as an island, strongly separated from what is happening in the rest of Europe, as some believe is possible—I do not—or as a full participant in Europe, we need to have monetary policy primarily dedicated to price stability. That is what the mechanism in the Bill can do. It can do it on a basis that gives greater openness and accountability. It would be far clearer and more understandable than our present system.
§ Sir Peter Tapsell (East Lindsey)
Many types of Bill come before the House: Government Bills, private Bills, personal Bills, hybrid Bills, attainder Bills—rather underused nowadays, especially in the case of Treasury Ministers—and private Member's Bills. When I first heard that my hon. Friend the Member for Wolverharnpton, South-West (Mr. Budgen) intended to produce this Bill, knowing his well-known opposition to the Maastricht treaty, with its great emphasis on the establishment of, first, an independent. British national central bank as a stepping stone to a still more independent European central bank, I assumed that we would be presented with a new category of Bill—a sardonic Bill.
Now that I have read my hon. Friend's article in The Times yesterday, heard him on the "Today" programme this morning arid listened to his admirable speech, I realise that the Bill is not a sardonic Bill but a probing Bill, rather like a probing amendment. With his characteristic modesty, my hon. Friend described the Bill as a very narrow and technical measure. But my feeling is that it represents the riot so thin end of what would prove to be a very thick wedge.
It seems to me inconceivable that any such change in the status and powers of the Bank of England could be brought about by anything other than a major and most important Government Bill. Nevertheless, it is extremely helpful that my hon. Friend has given us the opportunity in the Bill, which I hope will not reach the statute book, to have a valuable discussion of the principles and issues that the Bill raises.
In his article in The Times yesterday, my hon. Friend referred to something that my right hon. and learned Friend the Chancellor of the Exchequer was reported as saying in the Select Committee report. He said that the idea of an independent central bank, a more independent central bank, or a central bank with power to look after at least monetary affairs, had become fashionable. My hon. Friend queried in his article what the word "fashionable" meant. I should have thought that it was fairly clear what it meant. Lord Healey made the same point to the Select Committee. He described the idea of an independent central bank as a gimmick. He said that it was an apologia to be used by failed Chancellors to shuffle off their responsibility onto the Bank of England.
Lord Healey went one better. At an early stage of his Chancellorship, he shuffled off responsibility for both monetary and fiscal affairs on to the International Monetary Fund. I am bound to say that if one starts moving responsibility away from the Chancellor of the Exchequer, one should make sure to move his fiscal responsibilities along with his monetary responsibilities. I shall return to that point later.
The question of passing fashions in economic affairs is a real one. One thinks of prices and incomes policies, control of the money supply, medium-term financial 540 targets, the shadowing of the deutschmark, joining the exchange rate mechanism and then the attempt to establish a single European currency. They are all fashions which have come and gone. They have all been extremely disruptive and damaging to the management of the British economy. I have not the slightest doubt that the idea of transferring monetary power to the Bank of England falls happily into that category.
All those economic panaceas are designed primarily to achieve price stability. No one doubts that price stability is a highly desirable objective. It has been an objective of all Governments since the Stuarts, who set up the Bank of England and to whom my hon. Friend the Member for Wolverhampton, South-West referred. Most Governments, starting conspicuously with the Stuarts, have failed to produce price stability. Even during the long period in which Britain was on the gold standard and had an independent central bank, the price of wheat and the purchasing power of wages often fluctuated greatly. That shows that price stability is an infinitely complex problem which is not susceptible to any simple or single solution.
The fact is that stable prices, even when achieved, are a necessary, but not sufficient, element in the pursuit of steady industrial growth and general prosperity. Many different factors affect price levels. A successful economic policy requires a wide variety of interconnecting financial and economic policies constantly in need of modification in relation to each other.
I argue that to hive off control of monetary policy and interest rate movements to a so-called independent central bank would reduce our ability to co-ordinate fiscal and monetary policy. The Bundesbank is often cited as an example of an admirable independent central bank. No one denies that it has done a good job in Germany or that it enjoys enormous prestige due to Germany's experiences of appalling inflation in the early 1920s. However, in the past three years, Germany has demonstrated the great disadvantages of placing power and responsibility for monetary affairs and fiscal affairs in separate hands.
Ever since the reunification of Germany, to which my hon. Friend the Member for Wolverhampton, South-West referred, the Germans have run a far too lax fiscal policy, combined, partly as a consequence, with a far too strict monetary policy. That has caused tremendous problems within Germany and throughout Europe. It was, of course, the reason why the exchange rate mechanism impinged so harshly on Britain and continues to impinge harshly on France.
In my judgment, to give special separate monetary powers to the Bank of England would tend to produce exactly the same results for Britain. My basic technical criticism of all moves towards an independent Bank of England, particularly in monetary affairs, is the disadvantage of separating monetary policy from fiscal policy. The act and the art of balancing monetary and fiscal policy produces good economic performance.
Any fool can create stable prices or falling prices by plunging the country into slump conditions. That is precisely what the independent Bank of England under Montagu Norman did during the 1920s by its obsession with the gold standard and maintaining sterling at an overpriced parity against the United States dollar. Montagu Norman, the Governor of the day, took the view that the consequent unemployment was no responsibility of his. 541 That was a matter for the Ministers, whom he so despised, to grapple with. It was for them to shoulder the blame. His diaries make that absolutely clear.
By the same token, one may be certain that, while the modern Bank of England is happy to be given an inflation target—I understand that my hon. Friend the Member for Wolverhampton, South-West is now the hero of the Bank of England hierarchy—it would be horrified if, at the same time, it were given an unemployment target or a growth target. Indeed, senior people in the Bank of England—I do not talk to quite such senior people in the Bank of England as my hon. Friend does—have indicated to me that they would not be prepared to accept any such contract about unemployment or growth. I use the word "contract" in the New Zealand context.
I was honoured earlier this week to receive a letter from my hon. Friend the Financial Secretary to the Treasury, dated 25 January, which started-by reminding me that tax and spending should not be separated from one another and must be viewed together.
I am grateful to my hon. Friend for reminding me of that very important fundamental economic and financial fact. I suggest that the same argument applies to fiscal and monetary policy. That is the crux of the problem. The 1944 White Paper on employment, produced by all the political parties, is, in my view, still the best modern state document on economic policy. I recommend it to any right hon. or hon. Member who has not recently read it; it makes excellent reading, partly because, in addition to being exceedingly wise men, Keynes and Beveridge had the rare capacity in public servants of being able to write good English.
The White Paper laid down four objectives. It did not just try to pick out monetary arguments alone. It laid down the four objectives of post-war economic policy of trying simultaneously to achieve stable prices, high levels of employment, a healthy balance of payments and an expanding economy. Surely those are the objectives which every Government of whatever political persuasion should pursue in this country.
Only briefly, from 1952–54, under the Chancellorship of Rab Butler, at the time when I first joined the Conservative research department, of which he was also then chairman—we used to see a lot of him personally when he was Chancellor—have those objectives been achieved simultaneously in Britain in the post-war period. There was a considerable element of luck about that, because of the ending of the Korean war and the tremendous shift in the balance of payments and terms of trade in our favour. Nevertheless, it happened under Rab. I often heard him talk in private about the great difficulty when juggling with the economy of keeping all four balls in the air at the same time without dropping one. Harold Macmillan used to say the same thing. Those four balls need to be juggled with. It is no good thinking that one can just toss one of them across to the Bank of England and leave the politicians to play with the other three.
If the Bill became law, it would, by tossing away one of those balls, make the management of our economy more, not less, difficult, because it would separate monetary from fiscal policy.
§ Mr. Nigel Forman (Carshalton and Wallington)
On my hon. Friend's key point about the inadvisability, from 542 his point of view, of separating monetary and fiscal policy, will he care to comment on the current reality, rather than that which pertained in the early 1950s? With the exception of Britain and Japan, no other leading member of the OECD now shares his view that it is necessary institutionally to concentrate monetary and fiscal policy, and the prime responsibility for those policies, in one institution, whether it be Government or bank.
§ Sir Peter Tapsell
My hon. Friend dismissed Japan, which, until recently, has been the most successful country, economically speaking. In a few moments, I will quote Mr. Paul Volcker on the American experience. As to Europe, because of the dominance of the Bundesbank, there has been a fashion to allow the central banks much more power to control this, but that has recently had disastrous results. One has only to look at the economies of western Europe. Spain now has an unemployment rate of 22 per cent. France, my in-laws tell me—I have a French wife—is on the brink of revolution.
Despite the popularity of Mr. Balladur personally, the French people are desperately unhappy with the present economic situation. That is partly because the central banks of western Europe have been allowed to have too much power, and the Ministers, for a variety of reasons, partly perhaps through a lack of understanding of economics, have been pursuing a far too deflationary policy which is causing widespread unemployment through western Europe, and may, in due course, cause political instability.
§ Mr. Budgen
May I take up with my hon. Friend his point about the role of the Government in agreeing these targets? Of course, under clause 2, it is the duty of the Bank to attempt to achieve and maintain price stability. When the agreement is reached, the Chancellor comes to the decision with his knowledge of employment considerations, fiscal policies and all the rest, and brings into the agreement all those points that my hon. Friend makes about the three other balls. If, at a later stage, he finds that his consideration of the three other balls was not sufficiently taken into account in the agreement, there is the override power.
I hope that my hon. Friend will not be too much taken by the arguments of those who want an independent central bank. We considered an independent central bank in the Treasury Select Committee. Some of us were initially attracted towards that and the New Zealand model. But when we came to agree to the final recommendations, we abandoned that. This is a much more modest proposal.
§ Sir Peter Tapsell
It is a much more modest proposal, but it is, in fact, a stalking horse for a much less modest proposal, if I may use a term familiar to my hon. Friend. It is undoubtedly the case that the great majority of the people outside the House and in the City of London—Lord Roll's committee produced an extremely distinguished report on the subject recently—are the same people who were so enthusiastic for Britain to join the ERM, who argued that we should stay in it and rejoin it, are in favour of the Maastricht treaty, want us to go for a single European currency and want us to have a single, independent European central bank.
My hon. Friend is being wholly naive, which is a rare quality in him, if he believes that this modest measure is not regarded outside the House as something that will take us down the federalist path. That is my judgment.
§ Mr. Jenkin
I am most grateful to my hon. Friend for giving way. On the point about the four objectives of the 1944 White Paper, and maintaining those in balance, can he point to a period when we have ever allowed an unchecked rise in inflation? Has that ever assisted in the achievement of the other three objectives?
I point out to my hon. Friend that, during the period to which he refers, under the former Chancellor, Rab Butler, we were in a fixed exchange rate system, secured to a very solid and dependable anchor—the United States—during the 1950s. We are now in a period of floating exchange rates and, therefore, are dealing with more variables. Therefore, there is a stronger need for an anchor on one of those four policy objectives.
§ Sir Peter Tapsell
I certainly do not advocate inflationary policies, and I accept what my hon. Friend says; there has never been a period when, by running a lax monetary policy and allowing prices to rise, we have in any way safeguarded the other three areas of economic activity. Of course not. As I have said, stable prices are a necessary, but not sufficient, basis on which to establish success in the other three spheres.
I have not yet replied to the question of my hon. Friend the Member for Wolverhampton, South-West about the override. It is cloud cuckoo land to believe in an override, where the Chancellor of the Exchequer or, in some other countries, the Minister of Finance, can suddenly publicly announce that he has had a flaming row with his central bank and that the Government are going to take emergency powers to override the bank. The Governor of the day would resign, the gilt market would collapse, there would be a run on sterling, the Opposition would table a motion of censure and I would vote against the Government.
One need only read the history of flaming rows between Prime Ministers, Chancellors of the Exchequer and Governors of the Bank of England in the first 46 years of the century to discover that the one thing that they were determined not to do was to let the market know what was happening. No doubt the Mr. Soroses of the day would have a pretty good inkling of what was happening. One should not institutionalise an arrangement whereby the Treasury of a country will have public rows with its central bank.
As one of my hon. Friends has already said, there would not just be a problem with the tremendous increased cost of funding the borrowing requirement; it is also important to consider the wider political, financial and economic repercussions of a public dispute between the Prime Minister of the day, the Chancellor of the day and the Governor of their central bank. Those repercussions are so horrendous as to be unacceptable.
§ Dr. Jeremy Bray (Motherwell, South)
If the hon. Gentleman shifts his scenario to black Wednesday, does he really think that it would happen quite in the way that he has described? Surely the Governor of the Bank of England would say, "For Christ's sake take this shambles off my hands. Something must be done and it obviously affects your parish. Over to you." That is the reality of the situation.
§ Sir Peter Tapsell
From all accounts, although we have not yet had frank accounts of what happened on 15 and 16 September 1992, there was a panic. We do not know who said what to whom. The world realised that there was a 544 financial crisis in Britain, set off by the president of the Bundesbank, Mr. Schlesinger, who gave an extremely unwise press conference a few days before.
There is nothing new about such crises, because a similar situation arose when we went off the gold standard in June 1931. As it happened, Montagu Norman was on a Cunard liner in the middle of the Atlantic. When all the experts at the Bank of England decided that they had to go off the gold standard they told poor Mr. Philip Snowden, the Labour Chancellor—no one had ever told him before that that could be done and he had not thought of it for himself. They wanted to know how to get that news to Governor Norman, in the middle of the Atlantic, without anyone knowing. They spent a lot of time concocting a telegram and eventually Mr. Cockayne, the deputy Governor of the Bank of England, sent a cable which read, "Old lady goes off on Monday."
Montagu Norman was sitting in a deck chair on the promenade deck of the liner when that telegram was handed to him. He had spent the whole of his central banking career trying to keep Britain on the gold standard, having ensured that it was put on it in the first place. He read the message and assumed that it referred to a change in the holiday plans of his mother.
That incident shows that the crisis of September 1992 had honourable predecessors in our history. Nothing very much changes in the practicality of the management of economic and financial affairs whether the Bank of England is nationalised or independent.
Most changes in interest rates in this country have, in practice, been driven by external factors, not by domestic ones. They are usually connected with the exchange rate of sterling, which will remain a Government responsibility under the proposals of the Bill. So far as I know, there have seldom been serious differences of opinion between the Treasury and the Bank of England about interest rate policy, despite what the right hon. Member for Berwick-upon-Tweed (Mr. Beith) said. Arguments have arisen about the timing of an announcement, but the main arguments have been between No. 10 and No. 11 Downing street. That has happened under all Governments.
The most serious blunder in monetary policy since an independent central bank persuaded Churchill to return to the gold standard at the wrong dollar parity in 1925 was our decision, strongly urged by the Bank of England at the time, to join the exchange rate mechanism in 1990. To join it at all was a mistake, to join it at the wrong parity to the deutschmark was a blunder and to remain within it throughout the first nine months of 1992 was a folly, as I said at the time. Nevertheless, that policy, as far as we know, was fully supported by the Bank of England and by the leaders of the Labour and Liberal parties. They had urged the Government to join the exchange rate mechanism for a long time before we did so in the autumn of 1990.
My hon. Friend the member for Wolverhampton, South-West warned against that decision at every stage of the proceedings. He was much wiser—
§ Sir Peter Tapsell
I only spoke against it. I did not have the courage to vote against it. I have only fairly recently got into the habit of voting against my Government. I learnt at the feet of the master. However, my hon. Friend was right 545 when the Treasury officials and the Bank of England were wrong. Even Baroness Thatcher was converted and we joined the exchange rate mechanism.
If we had to choose an expert to run the monetary authority, we should not choose the Bank of England but my hon. Friend the Member for Wolverhampton, South-West, because he has a much better track record on such matters than most of the rest of us. He knows that I had a good deal of sympathy with his arguments throughout those years, as I said in public from time to time.
Short-term interest rate movements and fluctuations in the sterling exchange rate impinge much more directly on the political scene in Britain than they do in Germany or the United States. All the attempts to bring in bits of foreign countries to Britain are rather like heart transplants —they are extremely difficult operations which tend, in the course of time, to go wrong. The United Kingdom is a unique country. We cannot look at New Zealand, Germany or the United States and decide that we rather like a bit of their arrangements. We cannot plant that down in the British context in the hope that it will work.
I shared the views of Michael Foot and Enoch Powell, who were against the establishment of Select Committees, if I may say that in this gathering, because I thought that that was an attempt to introduce an American system into our way of life. It did have the result of emptying the Chamber of the House, as Michael Foot had predicted.
Our system is different. I have enormous admiration for Mr. Paul Volcker, who was chairman of the Fed for 10 years. In an recent lecture on the centenary of the Bank of Italy, he said:Economically large nations, relatively less exposed to foreign trade than the closely knit economies of Western Europe, may be less concerned about what the pursuit of an independent monetary policy does to their exchange rates.That is undoubtedly true, because sterling and the exchange rate have largely determined the level of interest rates, not the other way round. Almost all the crises about interest rates that I can recall have resulted either from sterling being under pressure or because it was thought to be getting too strong.
Neither Germany nor the United States has a close link between its short-term interest rates and its exchange rates. Nor is there a close link, as there is in this country, between their short-term interest rates and the home-owning millions and home-buying millions. I remind my hon. Friends that those people are crucial to the future of the Conservative party. They are potentially, and have traditionally been, loyal Conservative voters and I am not keen to hand them over to the tender mercies of the Bank of England.
§ Mr. Budgen
A new social and economic factor is the rise in self-employment. Most self-employed people are borrowing their money short term from the clearing banks, and will be very much affected by interest rate changes.
§ Sir Peter Tapsell
That is absolutely true. Home owners and small businesses in this country are tremendously concerned with short-term interest rates—probably much more, in a political sense, than those in any other country. Also, we export much greater proportion of gross domestic product than other countries, even Japan.
546 In America, the foreign exchange aspect hardly affects domestic politics. When the Americans had a huge double deficit under President Reagan, of which we heard so much—and of which I was rather an admirer—they had no difficulty in financing it, through vast sales of US Treasury bills to the Japanese. We have never been able to do that when we have been in a similar position; we have always had to raise interest rates to a high level to protect ourselves. Analogies with foreign countries are often irrelevant to the British position.
§ Mr. Forman
Is not the volatility of interest rates—particularly short-term interest rates—most damaging to a country such as ours, which has something of a housing fetish? It also damages small and medium-sized business men, who depend on short-term money. Does not the record show that such volatility is reduced when monetary policy is the sole responsibility of a more or less autonomous central bank? Given a record—under this or any other Government—of abrupt interest rate movements, we must surely favour a more autonomous banking institution.
§ Sir Peter Tapsell
I do not know whether than can be said with any certainty. I agree that interest rate volatility has been one of the banes of economic management in this country, but I do not think that it would necessarily be much reduced if responsibility for interest rates were transferred to the Bank of England, which would still have to face crises as they came along.
In the German crisis over reunification in recent years, the central bank tried to counterbalance the expansion and slackening of fiscal policy with an excessively stiff monetary policy. There is no historical proof that interest rates would be less volatile if they were controlled by the Bank of England; they must reflect the balance of payments, among other factors.
Britain, as I have explained, is different, because of the importance of our exports, our exchange rate problem and our house mortgage position. Moreover, the Bank of England is different from other central banks: that is often overlooked. I described the ways in which it was different at great length in one of our Maastricht debates, on 24 March 1993, so I shall not fully cover that ground again. It is a fact, however, that the Bank of England has an entirely different range of responsibilities from most other central banks—a much wider range.
For instance, neither the Fed nor the Bundesbank has supervisory responsibilities. They would have had nothing to do with BCCI or Johnson Matthey. There may well be a strong case for removing the Bank of England's supervisory responsibilities; but that is a different argument, and I shall not go into it now.
In comparing the Bank of England with other central banks, we must remember that we are not comparing like with like. The Bank of England is responsible not only for banking supervision, but for the management of the Government's borrowing requirement, the operation of the foreign exchange portfolio and what used to be one of its most important functions—exchange control. In many other countries, those four responsibilities would be carried out by organisations other than the central bank.
The enormous range of the Bank's responsibilities has been one of its great strengths. That is why it has had its finger on the pulse of the City and the international markets, and why—despite the embarrassment that its 547 supervision role has caused it in recent years—it wishes to retain that role. The Bank of England does not think that it can know all the detail of everything that goes on in financial markets unless it can supervise the banks.
The Bank of England is more or less unique in that regard. The proposition that an independent central bank need only focus on its role in monetary policy does not apply to it. Conversely, giving the Bank freedom in that one role but not in the rest of its wide range of roles would produce an administrative dog's breakfast. It reminds me of my later days in stockbroking, when Chinese walls were introduced. It was almost impossible to speak to some of one's colleagues; a separate lift had to be installed in my firm, so that we would not meet any of the chaps in the corporate finance department. I do not think that such moves are administratively sensible, apart from other considerations.
Monetary policy is only one of the many instruments of policy that have a bearing on inflation. If beating inflation is so important—and I agree that it is—and if politicians cannot be trusted to give it the priority that it deserves, logically we should take out of their hands not only monetary policy, but a range of other policies, starting with fiscal policy. I take the opposite, traditional view, however. It is said that war is too important to be left to the generals; I believe that national prosperity is too important to be left to the bankers. That is what makes all these panaceas and gimmicks so fundamentally undemocratic, however much effort is made to disguise the truth by means of artificial and inevitably ineffectual devices to achieve occasional accountability.
One reason for the present level of support for a more independent central bank is the idea that monetary policy is different from other policies. It is seen as a simple technical operation with a single clear-cut objective, and with well-understood and reliable techniques of operation. Let me tell my hon. Friend the Member for Wolverhampton, South-West, who has been a passionate monetarist over the years and with whom I used to clash in the early 1980s, that that is a delusion. It is the same delusion which led to excessive reliance on monetarism in the early days of the present Conservative Government and the latter days of Lord Healey's Chancellorship.
I frequently used to point out to Keith Joseph, Enoch Powell and Margaret Thatcher at that time—both in public and in private—that, while control of the money supply was an important instrument of economic management, it was exceedingly difficult even to measure the money supply, and virtually impossible to control it with any accuracy. Over many years, the Government have tried all the Ms, from M0 to M6, in an effort to prove me wrong; and they have failed. We hear very much less now about all these wretched Ms.
Historically, when high inflation has existed in the United Kingdom, it has not been only, or even mainly, the result of lax monetary policy—except, briefly under the Chancellorship of Lord Lawson; and that mainly reflected his mistaken exchange rate policy rather than his interest rate policy. Nor have I ever heard it suggested that interest rate policy has ever been conducted for long on terms of which the Bank of England disapproved, or that interest rates would have been significantly higher or lower in the past 15 years if the Bank had enjoyed monetary independence over that period—although, admittedly, the 548 Bank was a good deal more sceptical about monetarism in the early 1980s under Lord Richardson's governorship than were the politicians, rightly in my view.
The idealised picture of monetary policy that exists in some quarters extends further to the notion of the supposed infallibility of the men who would practise it within an independent central bank. In the same lecture to the Bank of Italy's centenary meeting, Mr. Paul Volcker also said:There are those who look upon monetary policy as a kind of abstract process conducted by a kind of special priesthood imbued with concepts about the money supply and inflation but somewhat removed from contact with the real world.That is a good satirical description of the view of some convinced monetarists on the subject.
One does not have to look into a crystal ball when one can read the book to see what happened when the Bank of England made all those monetary decisions. People sometimes forget that we had an independent central bank until quite recently. When I first started writing essays at school about the money supply we had an independent central bank—it was not nationalised until 1946. The "special priesthood", to use Paul Volcker's mocking phrase, was epitomised by the two Governors who dominated the Bank of England for most of the preceding years of this century: Lords Cunliffe and Norman.
Andrew Boyle, generally regarded as the best biographer of Montagu Norman, wrote on page 122 of his biography, which I have with me:Cunliffe proved himself a turbulent, mischief-making force to the end.Montagu Norman described Cunliffe in his diary as a "dangerous and insane colleague". Cunliffe said:The idea of Montagu Norman as Governor simply terrifies me".Those were the men who ran the independent Bank of England for virtually the first half of this century and made such an appalling mess of the British economy. They helped to bring Hitler to power and brought Mosley marching down Threadneedle street with his blackshirts. Now, some of my idealistic hon. Friends want to give back those powers to that source. That seems to be an incredible misreading of British history. Those were the special priests who ran the Bank of England.
§ Mr. Duncan Smith
I am listening attentively to my hon. Friend. The process of joining the gold standard, maintaining our membership of it and subsequently coming out of it was the result of a political decision. It was the Chancellor who took the decision, and many people around him advised him not to do it, although I accept that the Bank was not one of them. The decision to enter the gold standard was, therefore, a political decision, much like the recent political decision to enter the ERM. Does my hon. Friend agree that it is not altogether true that the so-called independent Bank of England was wholly responsible for those problems prior to the war? It was implementing a political policy.
§ Sir Peter Tapsell
Yes, but it was Montagu Norman who persuaded Winston Churchill to do that. In his old age, Winston Churchill told me that it was the biggest mistake of his political career—bigger even than that over the Dardanelles. He said that he had always regretted that, but the technical experts—Montagu Norman, the banking establishment and the City of London—unanimously advised him to do it.
Such unanimity has now prompted the Select Committee to recommend that we transfer monetary 549 powers to the bank of England. We must be extremely cautious about that, as the historical omens have not been good.
It was not only Winston Churchill who had problems with the Bank of England. Andrew Bonar Law as Chancellor of the Exchequer found Lord Cunliffe intolerable. Bonar Law wrote to Lloyd George, then Prime Minister, accusing the Governor ofan act of extraordinary disrespect towards the British Government and as I think a direct insult to me.Churchill, as Chancellor, found Montagu Norman, as Governor, almost as intolerable as Bonar Law had found Cunliffe. The Governors were utterly contemptuous of their Chancellors. If we were to recreate the independent Bank of England in the far more political and democratised atmosphere of contemporary Britain, those tensions would certainly return, probably in heightened form.
We must guard against the danger of the exceptionally agreeable character of the present Governor of the Bank of England misleading us into building permanent institutional arrangements that will one day be operated by much less emollient people. If I want sound advice on monetary policy I go to Sir Alan Walters. My experience of him over the past 10 years has shown me that, on monetary matters, he is nearly always right. He has enabled me to make quite a lot of money for myself by operating in foreign exchange markets following conversations with him—not when he was in office, as it were—on what was about to happen, when everyone else disagreed with him.
If one wanted an expert on monetary affairs with a good track record, and did not choose my hon. Friend the Member for Wolverhampton, South-West, one would appoint Sir Alan Walters to run monetary affairs. However, much as I admire and like Sir Alan Walters, I would not appoint him as Governor of the Bank of England. Such appointments have to be made on an institutional, not a personal, basis.
Tensions do not simply arise between independent governors and Chancellors; they arise directly between independent Governors and the public and the press. As Andrew Boyle says in his book on the life of Montagu Norman, by 1931 the Governor was "execrated" by everyone outside the top echelons of the City of London. His monetary policy, and that of his close friend and colleague Dr. Schacht, the governor of the Reichsbank, had been seen to be an absolute disaster for years.
Now, with the much more intrusive tabloid press and the immensely sophisticated corps of financial journalists, which did not exist in the 1920s and 1930s, a Governor of the Bank of England who was responsible for a highly contentious monetarist policy, in difficult times of rising interest rates and rising unemployment, would attract an astonishing degree of personal opprobrium. The Sun newspaper would take a keen interest in the private lives of even the most staid clerks in the Bank of England. I do not think that those working in the Bank of England have any concept of what they would be letting themselves in for if they accepted responsibility for monetarist policy.
§ Mr. Barry Legg (Milton Keynes, South-West)
I fear that my hon. Friend may be contradicting a point that he made earlier, when he argued that the Bill would put monetary policy in a different compartment and seal it off from other aspects of monetary policy. My hon. Friend is 550 now saying that a Governor of the Bank of England with the incremental increase in powers suggested in the Bill would be subject to the pressures and consensus that exist in society in general.
§ Sir Peter Tapsell
He would be subject to pressures, but not parliamentary discipline. He would certainly attract all the unpopularity that we politicians rightly attract when we get economic policy wrong. But the Chancellor of the Exchequer can be dismissed by the House of Commons if we lose confidence in him. The Prime Minister of the day can dismiss him, as we have frequently seen. But the Governor of the Bank of England is virtually irremovable from office. I do not think that that contradicts anything that I said earlier.
§ Sir Peter Tapsell
I believe that the dismissal of the previous Chancellor of the Exchequer, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), occurred because many people in the House felt that he had not made a success of monetary policy. Selwyn Lloyd was dismissed by Harold Macmillan because many of us had lost confidence in Selwyn Lloyd's monetary policy—that is exactly what happens. Irrespective of whether it should have happened, the fact is that it can happen. It would be made much more difficult if an independent Governor of an independent bank were running these matters. He would attract enormous personal opprobrium and Threadneedle street would become very much like Rupert Murdoch's Wapping. The Bank of England would not like that.
In practice, the Bank has escaped virtually unscathed from the recent ERM crisis because of its consitutional position. I welcome that, because, of all the nationalisation measures put on the statute book by the Labour Government following the 1945 general election, the first and least controversial and the most successful was the one nationalising the Bank—the Act which my hon. Friend the Member for Wolverhampton, South-West now wishes to amend.
Winston Churchill had five years of unhappy experience as Chancellor of the Exchequer in the 1920s dealing with an independent central bank. On 16 August 1945, as leader of the Conservative Opposition, he made his first speech in the House after the 1945 defeat. It was one of his greatest speeches and what he said in it about the Balkans could be said today. It was the speech in which he first mentioned the iron curtain. He did not, as is often claimed, first mention it at Fulton, Missouri in 1946. In the course of that great speech on the Loyal Address, Winston Churchill said:The national ownership of the Bank of England does not in my opinion raise any matter of principle.—[Official Report, 16 August 1945; Vol. 413, c. 94.]Oliver Stanley, speaking later on Second Reading, as the Tory Front-Bench spokesman on finance—another great lost leader of the Tory party—did not make any severe criticism of the proposed nationalisation of the Bank.
551 It has always been accepted by the more numerate Conservatives—I use a neutral phrase—that the 1946 Act that nationalised the Bank of England is a good basis on which to operate our economic affairs.
§ Mr. Forman
Many of the earlier arguments in my hon. Friend's magisterial speech were devoted to excoriating the power of fashion in economic doctrine, but he has just given a vivid example of that same point. It was fashionable in the post-war consensus to approve of nationalisation, but the world has moved on and it is time to denationalise this institution and give it greater independence.
§ Sir Peter Tapsell
My hon. Friend is not quite right. It was not fashionable in the Conservative party to favour nationalisation. We bitterly opposed every nationalisation measure in the 1945 Parliament, except the one for the Bank of England. That was because Hugh Dalton, the Labour Chancellor, on moving the Second Reading of the 1946 Bank of England Bill, said:We do not intend any day-to-day interference by the Government or the Treasury with the ordinary work of the Bank. On the contrary, we intend to leave that ordinary daily work, much of it of great importance, with confidence to the Directors and to their efficient and well-trained staff."—[Official Report, 29 October 1945; Vol. 415, c. 44.]The post-war Labour Government were as good as their word. All Governments have supported Hugh Dalton's concept of how the Act should operate.
In the English way, much has depended on the personalities involved. My experience of the City, which stretches over 35 years, has been that attempts at codification, of which this Bill would be another, are usually counterproductive. The Governor's eyebrows were a great deal more efficient than sterling M3 or the Securities and Investments Board. Strong Governors such as Lord Cromer and Lord Richardson may have shown more independence than some other Governors, but, in practice, the Bank has never been, over a wide range of its responsibilities, either the Treasury's poodle or just its City office.
The Bank has performed its many roles with efficiency and distinction. At a time when many of our national institutions are under attack by cynics, as the Chief Secretary to the Treasury pointed out in his admirable lecture a fortnight ago, the Bank of England, along with the armed services, is still a part of our national life which is greatly respected. In addition, the Bank is immensely admired throughout the world. Those who attend, as I have attended, almost every IMF meeting in the past 30 years, will know that, in private, all the central bank governors speak with enormous respect of the Bank of England. Of all the central banks, it is the one which is most admired.
As a good Tory, I am instinctively reluctant to tamper with the roots of healthy trees, a point of view that I would have expected my hon. Friend the Member for Wolverhampton, South-West to share. My hon. Friend has performed a service by giving us the opportunity to debate these matters, but, for the practical, historical and philosophic reasons that I have given, I hope that elected Members of Parliament who are temporarily appointed to ministerial positions in the Treasury and fully answerable day by day to the House, will continue to conduct the monetary, as well as the fiscal, policies of our great trading nation.
§ Dr. Jeremy Bray (Motherwell, South)
The nature of the debate has changed somewhat from that of Second Reading of a private Member's Bill to a general review of the evolution of monetary policy during this century. I should like to return to the Bill and I commend the initiative of the hon. Member for Wolverhampton, South-West (Mr. Budgen) in airing what has become a fashionable idea.
The hon. Gentleman's initiative appears to be part of a concerted campaign. We have had reports from the Select Committee on the Treasury and Civil Service and from the CEPR under the chairmanship of the noble Lord Roll of Ipsden, and a new Governor of the Bank of England has been appointed. All that has led to an opening up of ideas and the running of this hare.
Both the Select Committee and the Roll committee started work last spring in the aftermath of Britain's withdrawal from the exchange rate mechanism in September 1992. Their work was reinforced by the difficulties of France and other countries in July 1993. That wrecked the Maastricht timetable and postponed the prospects of early monetary union in Europe.
In that situation, the Chancellor, robbed of his nominal peg of an exchange rate target, having long since abandoned money supply targets, had to find another nominal peg by which to control inflation. he took the ultimate one, inflation itself, and adopted the target of 1 to 4 per cent. per annum as a practical, operational objective of current economic policy.
Previously, that had been dismissed as impossible because there is so much else that affects inflation. To bolster the credibility of that peg, the Chancellor invited the Bank of England to produce what it said would be an independent report on inflation. The first inflation report was issued in February 1993 and gave the Bank's view of the inflation process. It still makes good reading. The Bank argued that inflation is a monetary phenomenon, and that in the long run, monetary policy determines the rate of inflation. It argued that there was no necessary long run causality from costs to prices but that both reflect underlying real and monetary shocks. In other words, it has shifted its ground. Real shocks affect prices—affect inflation. But in the short run, it argues, the dymanics of the inflation process mean that changes in costs are a leading indicator of changes in prices. In other words, money may cause the increases in prices, but we will see the changes in costs first. Therefore the inflation report contains a consideration of the costs of imports, of the exchange rate, of commodity prices, of unit labour costs, of business margins and of indirect taxation.
Having dealt with such a wide background to the whole economy, the Bank reverts to saying:Monetary conditions are the principal determinant of inflation in the long run.It makesan analysis of monetary and fiscal policy. The former [monetary policies] relates to short-term developments in monetary conditions and the latter—that is fiscal policy—relatesto expectations of future monetary conditions in the medium term.In other words, it is not monetary policy that is creating the medium-term prospects of inflation; it is fiscal policy that is creating those medium-term conditions.
553 So the Bank considers in its inflation report monetary policy instruments, interest rates and monetary aggregates, but then it continues to consider fiscal policy. It argues that the rate at which inflationary pressures respond to the monetary stance depend on demand and supply conditions in product and labour markets. So it considers business and consumer optimism surveys, debt, capacity utilisation, unemployment and inflation expectations. Initially, therefore, the Bank, in its outline of inflation, said that it was examining virtually the whole economy.
It is true that initially, in February 1993, there was fleeting reference only to competitiveness and to the balance of payments, but that increased in August to November once the Bank became a little more confident about what was happening in the balance of payments, because we had the black hole of no trade figures early in 1993. There is still no mention of total factor productivity and of endogenous growth, but one may be sure that it will not be long before the Bank climbs on to those bandwagons.
Effectively, the Bank is mapping out a picture of the entire economy in the context of its so-called independent inflation report. I do not argue with the pattern of its exposition. It is a straightforward and fairly eclectic view of the inflationary processes, but it is no basis for the assignment of the instrument of monetary policy simply to control inflation. There is no attempt to justify that in the Bank's inflation report.
Further, in its background argument, the Bank has published no research that I can find—not in the reviews at least—during the past year which has any bearing on that. There is a bit of work on something called VAR—vector autoregressive estimates of forecasts—but that is a "black box" method for checking on the forecasts made by more economic and less handle-turning methods, and there is an exercise in the assessment of divisia measures of money.
The hon. Member for East Lindsey (Sir P. Tapsell) referred to the sorry history of the Members. The current fashion is that no particular Member will do. One tries different averages of all the Members and one searches for an average of all the Members which behaves as one expects it to behave. That was considered recently by the Bank of England, but nothing here considers the actual ways, given one's objectives, in which one sets instruments. The Bank in its own internal research is not equipped to do that. It is narrowly defined, a fairly technical thing—given these objectives, how does one adjust the instruments to achieve what one wants?
The Treasury can do it. The Treasury has been doing it for years, but the Bank has never equipped itself to do it. Further, the economist in the Bank of England—Brian Henry—who has the best published track-record of work in that field has latterly been posted to Washington. As far as I can see, the Bank has no one who is expert in that area at all. The talk in the inflation report, in technical economic terms, is just so much waffle.
I am sorry that the Treasury Committee does not get round to examining those things in the way in which we used to in the early days of that Committee. As a founder member, I well remember the efforts that we made to get at the underlying economic argument. Unfortunately, little attention is paid to that in the report on which the Bill is based.
554 Inflation is affected by just about everything and by all the instruments used by the Government in their economic policy. Those instruments affect just about everything else, so technically to assign one instrument to one objective is bound to produce an inferior solution. Let us consider the practical situation on black Wednesday. Given the stance on fiscal and monetary policy, the notion that the Bank could control the exchange rate was not on. In such circumstances, there is not a public row between the Treasury and the Bank.
To reminisce, I was Parliamentary Private Secretary to George Brown in 1964 and during the first sterling crisis I witnessed the half-hourly telephone calls between George Brown and the Bank of England, stating that so many hundreds of millions of pounds had gone. George Brown made frantic and hectoring calls to Dr. Blessing in the Bundesbank. That is not the image that the public have of what happens during a sterling crisis, but there is no public row. The damage is done in the months and years beforehand in which the conditions are created that make such a situation inevitable in today's speculative financial markets.
Where do we go from here? The Roll committee is a different animal from the Treasury and Civil Service Select Committee. Incidentally, Eric Roll is not inexperienced in the handling of fashionable ideas. He was the permanent secretary to the Department of Economic Affairs when George Brown produced the national plan before later going on to other things in the City. Realising that one could not build a case on the assignment argument of using monetary policy to stabilise inflation, the Roll panel appealed to credibility.
Before black Wednesday, we were told that interest rates would be higher if we devalued because of the loss of credibility. Had I known that the ex-Chancellor was going to be here today, I would have dug up the speeches that he made at the time assuring us that that would be the practical effect, that we should have higher interest rates if we abandoned the exchange rate mechanism.
Of course, the real problem was that before black Wednesday the policy stance had ceased to be credible in the financial markets because the markets had ceased to believe that a Government would continue paying the cost, in jobs, growth and output, that resulted from our trying to maintain the exchange rate. The real economy made the monetary stance incredible.
Credibility has nothing to do with the degree of masochism with which one is prepared to take the slings and arrows of outrageous financial conditions; it is about one's ability, in the political reality, to continue to do what one says that one is doing. The Government ceased to be credible. It was not simply a matter of commitment to a financial target. One can scarcely restore one's credibility, in real or political terms, by assigning the instrument of monetary policy to the particular target of inflation and parcelling it up to hand to the Bank of England.
The metaphor of juggling balls is confusing and misleading because it suggests short-termism and that there is something clever in what one does this week and next week and what one did the week before.
It is not that kind of game. If they are balls that are being juggled, they are huge balls of dough, which flump around and cannot be pushed down the corridor, but, nevertheless, roll and sweep people out of the way. Such vast, amorphous tides in the economy need to be anticipated and sensed in the months and years ahead.
555 The Treasury and Civil Service Select Committee and the Roll panel sought to tackle that problem by correcting the economic argument and by altering the political accountability of the Bank of England. That was to be achieved by appearances before the Treasury Committee, by debates in the House, by approval of orders, and by an emergency override for the Treasury. I am a supporter of Select Committees. I was a founder member of the Treasury Select Committee and was a member of other Committees before and have been since. The Bill, or an amendment to a Government Bill, presents a more realistic picture of the real powers and the ways in which they are exercised. Select Committees cannot act as an executive override with present concepts of parliamentary accountability.
A recent example of a Committee that came nearest to moving in that direction was the Select Committee on Industry which discussed the coal crisis. It produced a well-argued and practical report which appeared to have the support of Government Members, and there was some indication of dissatisfaction on the Government Back Benches. Potentially, that Select Committee report could have shaped Government policy, but political pressures overrode it. One can wager that we shall see in future that the Whips' office will be at it to ensure that future appointments to the Industry Select Committee do not include those subversive Tory Members who might undermine the Government's ultimate control over that Select Committee. That was what happened in the Treasury Commitee in 1983. It was overruled by the Whips' Office and never allowed to exercise its degree of independence. At the time, we had Kenneth Baker, Terence Higgins and a number of others who—
§ Madam Deputy Speaker
Order. May I remind the hon. Gentleman that Members are not referred to by their names but by their constituencies.
§ Dr. Bray
I beg your pardon, Madam Deputy Speaker. I was unforgivably lapsing into informality.
Select Committees cannot possibly act as a short-term check on executive mistakes in the way in which the Bill outlines. Clearly, the Bill argues for the assignment of instruments to enable the Bank of England to formulate and to implement monetary policy and to stabilise prices, and for the Treasury to set inflation bands and have a temporary override and to direct the Bank to aim monetary policy at other objectives if things come unstuck.
I give half a cheer to the hon. Member for Wolverhampton, South-West for raising the issue, but I am afraid it comes nowhere near the right diagnosis or answer. I encourage the Treasury Committee to look further.
There is a void in the economic and financial objectives of the Government. Simply having an inflation target of 1 to 4 per cent. is not an operational guide, because inflation is such a long-term phenomenon. Hon. Members on both sides of the House are committed to low inflation, but we are also committed to the other objectives of growth, managing the balance of payments and restraints on public borrowing
There was an operational framework in the Maastricht treaty to which hon. Members on both sides of the House were committed. It did not encompass growth and it did not deal with the balance of payments in the same way as it dealt with borrowing requirements, the debt-income ratio 556 and the rate of inflation. Nevertheless, it was a set of objectives which was achievable within the field that it tackled.
The difference within the parties related not to the reasonableness or desirability of those objectives or to the process of convergence in Europe in a common move towards the achievement of greater stability in underlying conditions. The difference within the parties related to the whether it was appropriate to abandon elements of sovereignty and our ultimate control of the exchange rate.
The Maastricht framework is still on the statute book —a commitment to the outline of European policy. It may not appear very relevant in the short term, but nothing stays still for very long in the world's economy and, sooner or later, we shall have to get back to the formulation of reasonable objectives. I believe that the framework set out in the Maastricht treaty is one to which we shall return. We shall be forced to do so and we shall find ourselves able to do so because we have had a bit of a fright. The political effects of that are only just being realised by Conservative Members, who express incomprehension at the fact that their party is being fabled the party of economic irresponsibility by comparison with the Labour party. Perhaps we have both changed.
At the moment, people differ not on the objectives but on the technical question of how we can shape our economic policy in pursuit of those objectives. It is at this time of doctrinal uncertainty about the underlying shape of policies that Select Committees can play their most useful role in analysing the problems and pointing the way ahead. The Treasury Select Committee did that in its 1981 report on monetary policy, which pointed out that one cannot ignore the exchange rate. The Government followed that advice.
The steps that the House can take are perhaps best illustrated by an amendment that I moved to the Industry Act 1975, which required the publication of forecasts, access to models and so on. The amendment, as originally moved, required the Government to set out their priorities. Once Governments have described their priorities, we can proceed to the technical task of finding the instruments that will be most likely to achieve those objectives. That is the kind of work that the Treasury and the Treasury Select Committee can do now, but which the Bank has abandoned.
I hope that the Bill will get no further than Second Reading. The debate on it has been useful but I hope that the public debate will now shift from the gimmick of the concept of the independence of the bank to address the much more important question of how objectives of economic policy should be formulated and how instruments of economic policy should be directed at achieving them.
§ Mr. Max Madden (Bradford, West)
On a point of order of which I have given you brief prior notice, Madam Deputy Speaker. I wish to draw to the attention of the House the killing in Bosnia of a British aid worker, Mr. Paul Goodall, and the injury of two other British aid workers. As we express our sympathy to Mr. Goodall's relatives and friends, I am sure that the British public will want us to ask what the Government propose to do to ensure that all aid workers and United Nations personnel in Bosnia, including British forces, are protected. With that in mind, would it be possible for the Government to make a statement later today? If not, can we be assured that a 557 statement will be made by the Foreign Secretary on Monday to provide information about the background to this tragic incident and to tell us what action is to be taken in the matters to which I have referred?
§ Madam Deputy Speaker
As the hon. Gentleman will know, it is not for the Chair to call for statements from Ministers. I have had no indication that a Minister wishes to make a statement to the House today. However, there are Ministers on the Treasury Bench and I have no doubt that they will have heard what the hon. Member for Bradford, West (Mr. Madden) has said.
§ Mr. Michael Spicer (Worcestershire, South)
I shall be very brief because several of my hon. Friends wish to speak and because my hon. Friend the Member for East Lindsey (Sir P. Tapsell) has made most of the points that I wanted to make.
My hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) presented his Bill very eloquently. I particularly enjoyed the dying phrases of his speech when he pointed out some of the paradoxes that might be thought to exist between the Government's defence of responsible Ministers—in this case, Ministers responsible for the monetary policy of this country—reporting to Parliament and the decrease in that responsibility through the foundation of the organisations of the EMI and the progress that that has made through the Maastricht treaty.
My hon. Friend the Member for Wolverhampton, South-West made a clear, precise and pleasing presentation. However, he was disingenuous. The idea that the Bill does not give greater autonomy to the Bank of England is disingenuous. The Bill starts by saying that it is a Bill toAmend the Bank of England Act 1946 so as to remove the general powers of the Treasury to give directions to the Governor of the Bank".My hon. Friend made it clear in an intervention that, for some time, he has had it in mind, for various reasons, to give greater autonomy to the Bank. Quite properly, the Bill should be seen from that perspective on both sides of the argument.
At one point, my hon. Friend the Member for Wolverhampton, South-West said that the Bill was all about openness. However, I see it in rather a different light. I believe that the Bill removes openness, but I will return to that point later.
I have two arguments against the Bill. I want first to focus briefly on the European dimension. It is not wrong to do that, because if the Bill received a Second Reading and there were further moves towards an autonomous Bank of England, it would be that much more difficult to argue against this country finally joining a single European monetary organisation run by a single central bank of which we would be part.
I do not want to re-run the Maastricht argument, but there is a specific point which I should like to draw to the attention of the House in respect of a single European monetary policy, which would be made easier if we had a single central bank in this country. It relates to a point made by my hon. Friend the Member for East Lindsey. He said that there is a relationship between fiscal policy and 558 monetary policy. Nowhere is that clearer than if we conceive of a single European monetary policy run by a single central bank.
If we had such a single monetary policy, there would be a single pricing policy throughout Europe. As there would not be a single wages policy throughout Europe, within the framework of Maastricht, the cohesion fund and so on, there would be the increasing introduction of compensatory fiscal policies. For instance, Greece, which had Greek wages but German prices, would be compensated for the very unsatisfactory position in which that would put Greek wage earners, so a massive fiscal undertaking would inevitably follow.
We cannot distinguish or compartmentalise monetary policy, vital though it is. My hon. Friend the Member for Wolverhampton, South-West used the word "important", not "exclusive". That point is highlighted by the European dimension in which a separate central bank would lead us.
Even if I am wrong, surely it is plausible that central banks, particularly those that become autonomous, operate as a co-operative. The inevitable result of a co-operative of autonomous central banks is that they focus on a common and fixed exchange rate between their various currencies. The excuse that they use—they certainly used it during the ERM period—is keeping inflation under control. I think that a quiet life is at the centre of the policies that automatically occur when central bankers get together—that is, fixing the exchange rate between their various economies. Even if I am wrong in suggesting that the Bill would make it easier to move to a single currency for this country, a more autonomous central bank, working together with other central banks, is likely to lead us straight back into managed and fixed exchange rates.
§ Mr. Duncan
Will my hon. Friend consider the other side of the Bill and answer a question that I should like to hear teased out? On one side there is the argument about independence and the question whether there is such a thing. I accept that, to a degree, that matter is ambivalent and not necessarily provable. However, the key point about the Bill is the accountability aspect, which, whatever happens to the idea of independence, is vital and might answer some of the charges about what happened in the run-up to the ERM and subsequently exercising policy within that. I refer to accountability to this Chamber.
§ Mr. Spicer
That is my second point, and I am grateful to my hon. Friend for leading me to it, now that I have dealt with my European worries.
I now refer to the second important issue—accountability. The independence that my hon. Friend the Member for Wolverhampton, South-West offers would lead to the Bank of England becoming a quango in spades. We must examine the Public Accounts Committee's report on quangos. I have great sympathy with that report. The Bill contains the concept of autonomous operational responsibilities. All hon. Members have written to a Minister on certain matters, for example the Child Support Agency, and received an answer saying, "I am not responsible for day-to-day management. Operational responsibilities have been passed elsewhere"—let us say to the chairman of the Legal Aid Board. I just happen to have had a lot of correspondence with him recently.
If one writes to the chairman of the Legal Aid Board or to the CSA board director, he will say that he is responsible for the day-to-day running, but that he is working within 559 parameters and policies that have been laid down by Ministers and that he cannot answer your question in that respect. The tone of that letter would be different from that which one would get from a Minister. If a Minister is rude to an hon. Member, he can ask rude questions back to the Minister on the Floor of the House.
The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that we have a lack of responsibility in the case of the Bank of England. However, his claim that by setting up greater autonomy, we would get more responsibility is the reverse of the case. There are so many examples of organisations that have been set up and given something called "operational responsibility". Those organisations must work within parameters that are not their responsibility. We do not get proper answers, and no one is apparently accountable.
I am concerned with the idea that somehow one can hive off something called "operational responsibility", but leave behind apparently the responsibility for setting parameters. That way lies the muddle that we are getting into. I am all in favour of privatising as much as possible, but, ultimately, one leaves the Government with, certain responsibilities. The major responsibility that one leaves an autonomous Government is that of managing the economy.
§ Mr. Duncan Smith
I want to make the point again that this place has, in a sense, been a spectator of so much of what has happened with regard to the setting of interest rates during the past four or five years. In reality, the House would have wanted to have much more say in that. Perhaps if we had had more say, some of the ERM arguments would have been exploded earlier. Does the Bill contain an essence of that, and does my hon. Friend agree that it is a salvageable element, whatever else he may feel about the Bill?
§ Mr. Spicer
I accept that there is a party structure and a whipping arrangement within Parliament which makes it difficult for individual hon. Members to get across views that are off-centre. I accept that that is the way in which we manage things The history of the two-party structure sometimes makes it difficult for individual hon. Members to hold Ministers directly accountable for their policies.
It may well be the case that, because of that, Parliament was not effective in holding Ministers properly accountable during what I would see as the debacle leading up to the ERM period, and our exit from it. I do not think that that is an argument in favour of hiving policies off to a great extent, or hiding them behind the closed doors of the Bank of England. I think that it was our fault collectively, although there were individuals who fought against the ERM policy. There is the structure within Parliament of forcing a uniform view, and I accept that entirely.
The question is whether we will obtain greater insight into policy by hiving off large chunks of it to the Bank of England. In my view, we are totally capable of holding government to its collective responsibility, because we have the means.
My hon. Friend the Member for Wolverhampton, South-West has done a great job in exposing an issue that has been lying dormant in many of our discussions for several years. My hon. Friend and others are right in believing that there is a fashion for saying that all our problems would be resolved by hiving off fiscal and 560 monetary decisions to the Bank of England. I disagree with that view. I am glad that the matter has been brought out into the open by my hon. Friend and that we have had an opportunity to discuss it in the way that we have.
§ Ms Diane Abbott (Hackney, North and Stoke Newington)
The Bill is best understood as a paving Bill for the independence of the Bank of England. It is for that reason that its deviser is a hero in Threadneedle street. It is to the value of increased independence and autonomy for the Bank of England that I propose to address my few remarks this morning.
I listened with some wonder to the hon. Member for Wolverhampton, South-West (Mr. Budgen) speaking in the unfamiliar persona of a man who is both meek and mild. I wondered whether this could be the savage disciple of Enoch Powell, the lion of Maastricht that the House has come to know so well. We were presented this morning with a mere humble handmaiden of the Governor of the Bank of England, Eddie George.
I put it to the House that both the conclusions of my colleagues on the Treasury Select Committee and the underlying premise of the Bill are based on certain false assumptions. Let me state first and foremost why the issue of monetary policy is so important. One might imagine from the poor attendance in the Chamber this morning and from the looks of puzzlement of some of the members of public in the Strangers' Gallery that monetary policy was a mere arid, technical matter. One might wonder why there should be such feeling, concern and focus on the issue among practical politicians.
Monetary policy is not an arid, technical matter. It is a crucial matter for industry, for which interest rates are vital, and for home owners, who are particularly important in Britain, with its high proportion of home owners. I can do no better than quote some of the evidence on monetary policy given to the Select Committee by an ex-Treasury knight, Sir Douglas Wass. He said:making decisions on monetary policy involves judgments about social welfare and the allocation of costs and benefits on a large scale between different sections of the population—judgments of a kind that we all recognise as essentially political.The fact that decisions on monetary policy are essentially political led me to dissent from the view expressed in the Treasury Select Committee report and leads me to oppose the Bill.
Monetary policy is not an arid, technical matter which a few bankers in a back room can deal with quietly. It is a matter at the centre of the political debate in Britain. The first fallacy that underlies the conclusions of my colleagues on the Treasury Select Committee and which underlies the Bill is the notion that there is some automatic causal relationship between an independent central bank and a strong economy and low inflation.
My colleagues on the Treasury Select Committee were so enthusiastic, gently nudged by Mr. Eddie George, to scramble on the bandwagon of independence that they did not take the trouble to read and listen to the evidence brought before the Committee. The conclusion of our own Clerk was that there wasno conclusive evidence of a causal relationship between the status of the central bank and inflation performance.That is what the evidence says, as opposed to what fashionable commentators and the chattering classes now try to nudge the House towards.
561 The truth is that the bandwagon of independence as the answer to the long-term economic decline in Britain is centrally based on the West German experience. Until recently, Japan had one of the most successful economies in the world. It does not have an independent bank. The argument that I put to my colleagues and that I put to the House is that one cannot extrapolate from the West German experience to make a watertight model that proves that purely from the creation of an independent central bank will flow the benefits of low inflation and growth that we saw in West Germany.
§ Ms Abbott
I am sorry, but I should like to make some progress.
The point is important because the balance of argument rests on a single pinpoint, the West German experience. I believe that one cannot, academically or intellectually, extrapolate from the West German experience and argue, as my colleagues seem to think one can, that there is a direct causal relationship between having an independent central bank and having West German standards of economic growth, and thus a West German-type strong economy.
§ Mr. Livingstone
The most recent example of a country moving towards having an independent central bank is, of course, Russia. Does my hon. Friend agree that that has not been a particularly good indicator of an independent central bank helping to reduce inflation?
§ Ms Abbott
I should think that the Russian experience is that not only is an independent central bank not the ideal weapon for fighting inflation, but it is not necessarily something that brings about great social cohesion and stability.
If there is no academic basis for believing that an independent central bank automatically brings low inflation and a strong economuy, what is the overwhelming attraction of it to hon. Members on both sides of the House? I believe that it would allow politicians to shuffle off the responsibility for interest rate levels that might well be democratically unacceptable to the population as a whole.
During our inquiries leading to the production of the report, the Treasury Select Committee was fortunate enough to meet Mr. Camdessus, the current president of the International Monetary Fund and an ex-governor of the Bank of France. In that knowing French manner, Mr. Camdessus put it to us that we as politicians should see the attraction of an independent central bank, because it would allow politicians to avoid the unpleasant political and democratic consequences of interest rates that are too high.
Although I understand the cynical argument for not allowing people to express their anger at high interest rates by directing it at politicians, who then say "Well, it is not us; it is the Governor of the Bank of England", I cannot see how anybody could argue that that would lead to an increase in democracy and accountability. Politicians and commentators who argue for an independent central bank are arguing for a monetary policy that is characterised by the slogan, "Not me, guy. Go and see Eddie George".
562 Another argument for the Bill, apart from what I believe to be the totally false argument about a causal relationship between an independent central bank and low inflation, and apart from the rather cynical argument that politicians do not like to bring forward, and that is behind much of the debate on the subject, is the notion of accountability. As someone who sat thorugh almost all the evidence-taking sessions, has read the Bill and is familiar with the report, let me say that the notion that, either in the recommendations of the Treasury Select Committee or in the Bill, there is any real advance towards accountability is wholly fraudulent.
What in the Bill and the report does that increased accountability boil down to? There is the much-vaunted override, which is referred to in clause 5 of the Bill. Many hon. Members have far longer experience of politics than I have and have been in and out of government, but I put it to the House that the override in clause 5 and in the Treasury Select Committee report is, in practice, wholly unusable; it could not be used in that form. It would become a weapon that was too dangerous to detonate. There is an element of fraud in hon. Members talking blithely about democratic override, which could not, as they know perfectly well—we discussed it among ourselves in Committee—in practice, be used.
In terms of accountability, another great gain that we are told that the Bill and the Treasury Select Committee recommendations encompass is the notion of greater openness. We saw the hon. Member for Wolverhampton, South-West standing before us, in his unaccustomed meek and mild guise, fluting sweetly about greater openness, as though greater openness in Government has ever been any particular concern of his.
Let us look at the greater openness that the Select Committee's recommendations and the Bill are supposed to amount to. It amounts to debating parliamentary orders. How many hon. Members here have stayed up recently to debate them? Such orders are notorious, because they are debated in the middle of the night by a handful of hon. Members. That is a wholly ineffective method of rendering any institution or policy accountable. Little time is given to debate those orders and few hon. Members take part in the debates.
We have heard a lot about how the Governor will come before the Treasury Select Committee to give evidence and account for himself. I would welcome yet another opportunity to hear Mr. Eddie George rumble on in his amiable and affable fashion. But where does the accountability lie in the Governor appearing before the Select Committee when it does not have the right to hire or fire or even to approve the appointment of the Governor? It has no direct control over policy. It would be charming to hear Eddie George rumble on in his inimitable, affable fashion, and his comments might be interesting to read, but that would not add one jot or tittle to effective, practical political control over monetary policy.
§ Mr. Duncan Smith
Surely the argument about parliamentary orders is not whether they are debated late in the evening by a certain number of hon. Members, because the blame for that lies with politicians. The opportunity to debate exists, and if we do not make use of it, it is our fault. Surely the argument should be that not enough time is allocated for the debates and that more is required.
§ Ms. Abbott
I accept that point, but I repeat that the proposals in the Bill and the Select Committee recommendations, which their supporters tout in evidence of the hugely enhanced means of accountability that will result, are token gestures. They will not give politicians, and, more importantly, the people any further direct control over monetary policy, which is so important to their lives, their jobs and their ability to pay their mortgages.
There is no academic or economic argument to suggest that there is a direct relationship between an independent central bank and inflation. The Bill will not result in any huge improvement in the methods of accountability, so why are so many hon. Members scrambling on to the independent bandwagon, as the hon. Member for Wolverhampton, South-West has suggested? In part, they are victims of fashion. I can do no better than quote from "General Theory of Employment, Interest and Money" by Keynes, who said:Practical men, who believe themselves to be quite exempt from any intellectual infuences, are usually the slaves of some defunct economist".If there was ever an example of that Keynesian theory, it is the current fashion in the press and in the House to talk about independence as some solution to what I suspect is the long-term economic decline of the British economy.
The problem with the Select Committee recommendations and the Bill, and the reason why I believe that the hon. Member for Wolverhampton, South-West and some of his colleagues have latched on to the proposals with such alacrity, is that they would institutionalise monetarist policies and the monetarist emphasis on low inflation above every other consideration.
§ Ms Abbott
Yes. It would institutionalise monetarism in our political processes. That is why enthusiasm has been displayed by such xenophobes as the hon. Member for Wolverhampton, South-West for what is, essentially, a foreign notion. That is why I am still amazed that my colleagues could find it in themselves to sign the Select Committee report.
One of the problems that politicians often encounter is that it is sometimes difficult to interest the wider public and the popular press in issues which, although they are vital, seem very boring. Monetary policy is a case in point. I can only repeat what has been said throughout today's debate: the issue is too imporant to be left to bankers.
Let me quote again from a Treasury knight, Sir Douglas Wass. According to him,It is not the job of central bankers to judge how far it is right to go on damaging the standard of living of some members of the community or destroying the jobs of others, in order to bring inflation on to some particular path".That, essentially, is the reason for my opposition to the Bill, and that is why I would not sign the Select Committee report.
All hon. Members should take the trouble to read not just the report but the evidence presented to the Committee, which will reveal that some of the fashionable theories about independence that are being touted by politicians of all parties have no basis in fact. The notion of independence will join five-year-plans, little Neddy, monetary targets and the ERM: it will be seen as one of the series of failed nostrums for the underlying cause of the economy's failures.
I believe that any move towards greater independence and autonomy for the Bank of England in regard to 564 monetary policy would be anti-democratic. It would not be defensible in any economic or academic terms. No doubt both the Select Committee report and the Bill have brought a smile to the faces of Mr. Eddie George and his colleagues in Threadneedle street; but it is not too late for hon. Members to consider the fundamental issues of democracy that underlie this debate on democracy.
§ Mr. Quentin Davies (Stamford and Spalding)
I congratulate my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) on winning the ballot, and on choosing to frame his Bill around such an important issue. I thank him for doing me the honour of asking me to sponsor the Bill; I do so with great pleasure.
I agreed strongly with at least one thing said by the hon. Member for Hackney, North and Stoke Newington (Ms Abbott). This is not merely a technical issue; it is a matter of major national importance. The future of the pound, and the monetary framework in which we are to lead our national lives, are issues essential to the achievement of our economic ambitions—and, indeed, to the maintaining of national self-confidence.
It would be a great shame—and, to some extent, a dereliction of parliamentary responsibility—for us not to take the opportunity presented by my hon. Friend the Member for Wolverhampton, South-West to debate this Bill, not only at this stage but in Committee. That will encourage the public who sent us here to consider the matter, absorb the arguments, send us representations and continue to discuss an issue which—whatever happens this afternoon—will not go away.
For two reasons, the Bill is especially pertinent now. First, we have brought recorded inflation down to the lowest level for 30 years—the lowest level achieved in the adult lifetime of many hon. Members who are present today. That is thanks to decisions made by Ministers and, in large measure, to the decision to join the ERM. The great question is whether we can sustain that achievement. Can we prevent inflation from roaring ahead again? Have we cured definitively, or merely suppressed temporarily, the besetting British disease of inflation? Inflation was at the heart of our relative post-war economic decline; it was also one of the major sources of the lack of national self-confidence from which the country has suffered for too long.
What can we do to lock in that achievement of low inflation—to prevent inflation, and inflationary expectations, from emerging again? If there is an institutional measure to be conceived that is likely to produce that result, it is the one proposed in the Bill.
The second reason why it is pertinent for us to discuss the subject now is the international context. Only a few years ago it was exceptional for any country to have granted a central bank independence in the conduct of monetary policy. Until recently, the only examples were Switzerland, Germany and, to a slightly qualified degree, the United States. But it has now become the norm in the western world.
I am not suggesting for a moment that we in the House should be influenced by fashion. We should not consider making institutional changes, let alone any as important as the one that we are discussing today, merely because that appears to be the fashionable thing to do in the world. If we 565 believe that the fashion is misconceived, we should not follow it. But it would be thoroughly irresponsible not to take account of what is going on in the world.
There is competition among the different currencies in the world. International investors have a wide choice of convertible currencies in which to hold their assets. We want them to be keener to hold their assets in sterling than in other currencies, as that will mean, over time, that there are lower real interest rates in sterling than in other currencies. We must ensure that investors believe that the chance of the devaluation of sterling against other currencies, over time, is small, and the chance of revaluation is correspondingly high. We must improve our monetary credibility.
Many other countries have acted in a way that they consider will increase their monetary credibility. Some of them are neighbouring countries in the European Union such as Holland and France, as well as those hoping to join the European Union such as Sweden. Other countries on the other side of the world that have nothing to do with the European Union, such as New Zealand, have also taken interesting steps in the same direction. We must be concerned that we may not only not enjoy a competitive advantage, but actually have a competitive disadvantage if it appears to potential holders of sterling that the parity of sterling and the extent of growth of the monetary supply in this country are still at the behest of political pressures to a greater degree than in other countries. Those are two reasons for considering the subject today and for being grateful to my hon. Friend the Member for Wolverhampton, South-West for giving us the opportunity to do so.
Something remarkable has happened in the House. In the Treasury Select Committee, on which I have the honour to serve, we achieved a remarkable consensus between the three parties represented, with the sole exception of the hon. Member for Hackney, North and Stoke Newington, as she conceded.
There are differences of emphasis between us, and differences in some of our recommendations on the future shape of the Bank of England. But we were agreed on four essential points. The first subject of agreement was the importance of price stability and the need to prevent inflation from re-emerging in this country. It is clearly set out in paragraph 73 in the Select Committee's report. It states:the maintenance of price stability should be the primary objective of monetary policy.There are many other such statements. We would not have obtained the consensus of the three parties on that subject, certainly not in that sense, a few short years ago.
Secondly, there was general consensus that there are strong theoretical grounds for believing that the greater the degree of independence of the institution responsible for the conduct of monetary policy from party political and electoral pressures, the greater the integrity with which that monetary policy will be pursued, and the greater will be its constancy and credibility and therefore its effectiveness in achieving and maintaining price stability.
Thirdly, there was general acceptance of the great weight of empirical evidence that in practice there is a strong and postive correlation between the degree of independence of monetary institutions and inflation. That is so clear that the country that has given the greatest 566 independence to its central bank, Switzerland, is top of the league for monetary performance measured by price stability since the second world war. Second in that league is the Federal Republic of Germany. The United States is somewhat lower, but we know that the federal reserve system is slightly more at risk of being influenced by political pressures.
Only one country stands out from the general trend on the graph: that is Japan, but it is a special case because for 40 years until last year the Government of Japan was in the hands of a single political party, the Liberal Democrats. That party was committed to sound monetary principles, but it was never at serious risk of losing power, and for that reason monetary policy was not subject to the short-term electoral pressures that prevail in other democracies. Until the past few months the key power plays in Japanese politics were within and between factions in the ruling party rather than between parties. That goes a long way to explain that sole exception. It is unusual in economic affairs to have such a clear empirical relationship between an institutional framework and measurable economic outcome. That was the third important matter on which the Committee agreed.
Fourthly, the Committee agreed that the Bank of England is more than capable, by virtue of its world reputation and the proven confidence of the people who run it, from the Governor and the court to the various departments, of playing just as effective a role as an independent central bank as the role currently played by the Bundesbank and the Swiss national bank. There is therefore little reason not to capitalise on those talents and on the Bank's reputation and allow it to do for us what those other institutions have successfully done in their respective countries. There was considerable consensus on this important issue.
There was agreement in the Committee between all three parties, with only one person dissenting on these points which perhaps amount to 85 per cent. of the argument. But, of course, beyond that there are divergencies. I diverge on one or two matters in the Bill. My hon. Friend the Member for Wolverhampton, South-West has generously said that if the Bill goes to Committee he will be prepared to look at those matters. Perhaps I may anticipate some of the arguments which I hope will be heard at greater length in that Committee. For reasons that I fully understand, my hon. Friend sets out the possibility of a parliamentary override of the monetary policy being pursued by an independent Bank of England. I understand the strong reasons for democratic accountability and the sovereignty of Parliament that will cause many hon. Members to agree with my hon. Friend.
I think that that is misconceived, and the reason goes to the heart of the argument about democratic accountability, which my hon. Friend the Member for East Lindsey, (Sir P. Tapsell) developed this morning at some length. The reason is this. I believe that it is inappropriate for a non-elected agency to determine the complex moral and political trade-offs between different policy objectives, which can only, in a democracy, be debated openly and be determined by a representative body such as the House of Commons.
But that is not to say that it is not thoroughly reasonable for us to decide democratically that we wish to endow ourselves with a better chance and better mechanisms of achieving price stability and therefore that we shall give to an institution, the Bank of England, a specific and single 567 technical task—to achieve price stability. That is a democratic decision. We are saying to the Bank, "We would like you to produce a monetary framework in which businesses, Government, employers, employed, savers and consumers can plan their affairs and operate—a framework of stability."
That is a framework which would replicate the objectivity of the monetary system that we enjoyed for three generations before 1914, in the heyday of the gold standard. At that time, the supply of money in the world was not determined by politicians' choices. It was determined by an entirely objective fact—an exogenous fact, as economists would like to call it, no doubt—which was the supply of gold in the world. That was a fairly arbitrary factor, and there was always a danger that, as did occur, if someone found more gold in the Yukon or elsewhere, prices throughout the world would increase as a result.
I am not for a moment suggesting that we should return to the gold standard, but the degree of objectivity that the gold standard provided before 1914, which assured a stable monetary environment, was a framework in which the human race enjoyed a level of growth rates, of output, of employment, of prosperity and of international trade, which was unprecedented.
My hon. Friend the Member for East Lindsey dwelt a lot on the 1930s, 1940s and 1950s, but if he had looked a little further back he might have found himself inspired, rather than put off, by examples of greater monetary stability.
Another aspect of my hon. Friend's Bill may be misconceived. That is the suggestion that Parliament should quantify price stability and should state that a specific price index has to be targeted. That is a dangerous principle because there never has been agreement between experts or even non-experts as to what index is the best reflection of inflation, and the Bank of England continually produces a series of new indices which, it believes, better reflect inflationary conditions.
No one believes very much these days in the retail prices index—RPI. We have been focused for some time now on RPI X, which excludes mortgage interest. The Bank of England has now suggested that we should watch a third index, RPI Y, which excludes mortgage interest and indirect taxes. No doubt, as the months and years go by, a plethora of alternative indices will be proposed. Therefore, any monetary policy that is expressed in terms of hitting a particular target in a particular index will always be open to question. People will ask whether the appropriate index is being used, because they will say that inflation is much greater than that index would indicate because other indices show a very different result. If Parliament continually changes the indices that it is targeting, that in itself will undermine the policy's stability and credibility.
It is far better that Parliament establishes that an independent Bank of England has a responsibility to maintain price stability. It is then up to the Bank to defend its achievement of that objective—to defend it in the markets, to public opinion, to the House, to the Treasury and to the Treasury Select Committee or to any other Select Committee to which the Bank will, from time to time, have to give an account of itself under the Bill.
§ Mr. Legg
My hon. Friend is saying that Parliament should be involved in setting the targets and indices, but that does not accord with the Bill. Under clause 3, it is the 568 Treasury which, after consultation with the Governor of the Bank of England, will set policy targets for the Bank's carrying out of its primary objective.
§ Mr. Davies
I take my hon. Friend's point, but, of course, I am not assuming that we make the Treasury independent of Parliament. The assumption behind my remarks was that Treasury Ministers would still be subject to the House and that whoever happened to be Chancellor of the Exchequer would have to have the House's support and confidence. I am personally very attached to that principle as, I am sure, is my hon. Friend. I do not think that any conflict will arise.
If the targets were defined by the Treasury or by Parliament, there would be a problem deciding how frequently they were to be restated. The Bill is rather coy in this respect and simply states:Policy targets may be set for the term of office of the Governor, or for specified periods during the term of office of the Governor, or for both".So the targets can be set for any length of time. As we know, there are long time lags between adjustments of monetary policy and the outcome in terms of retail, consumer or even producer prices indices. There can be time lags of one, two, three or even more years in certain circumstances, so it would be absurd if the targets were reset at too short intervals. For example, if a target were reset annually it would be reset long before anyone could know how effective the one set the previous year had been because it would be too early to judge the outcome. If a target were set for a much longer period, there would be a greater chance of spanning a general election and Parliament would then be fully entitled to reconsider it.
That leads me directly to the issue of the parliamentary overrides. There would be a great deal of speculation in the markets about whether Parliament would override or perhaps change the target. I think that both options would be regarded as equivalent dangers. Many people will believe—cynically but perhaps correctly—that if given the chance to fiddle the targets or to introduce an override, politicians would not be able to resist the temptation so the credibility of policy would be undermined and one of the purposes of giving the Bank greater independence would be negated.
If we want to give the Bank greater independence, we must resist the temptation to reduce that independence subsequently in practice, or we shall undoubtedly negate a large part of the purpose in which we are engaged.
The only way to ensure that monetary policy is seen as being thoroughly and definitively emancipated from short-term political pressures is to give the Bank of England an entirely independent status. Of course, nobody can overturn the sovereignty of Parliament and, as my hon. Friend the Member for Wolverhampton, South-West is proposing to alter the Bank of England Act 1946, so future Parliaments will be able to alter the Act that may emerge from his Bill. No one would wish to deny future Parliaments that possibility, but that would be an explicit strategic decision, which would be difficult for a political party to take, unless it had promised to do so in its manifesto and it would require a Bill to go through all its stages. It could not be a mere order, which, as the hon. Member for Hackney, North and Stoke Newington said, could be easily slipped through the House without a full appreciation of its risks, dangers and costs.
There are two points that need to be dealt with in that context. One issue was raised by my hon. Friend the 569 Member for East Lindsey while talking about the need to co-ordinate fiscal and monetary policy. I am sorry that he is not in the Chamber now, but I enjoyed his speech and his anecdotes about conversations with some of the great figures of the past were fascinating. However, his economic theory had a nostalgic flavour. He was honest enough to say that he considered that the distillation of economic wisdom was the 1944 White Paper on unemployment. He was clearly attached to the formalisation of much of that thinking, which was achieved by Phillips in the 1950s with the famous Phillips curve. My hon. Friend clearly believed that there was a long-term trade-off between monetary rigour and price stability on one side, and employment on the other.
That view is not generally shared today either in financial markets or in academic circles. If one takes the view that my hon. Friend does, that Government should be pursuing different objectives, low inflation, employment, balance of payments and so forth, one is pursuing potentially contradictory policies. Perhaps it is not an accident that Governments who have tried to target different variables believing them to be contradictory have ended up by achieving none of them. That has been the sad story of British Governments since the 1940s—
§ Mr. Deputy Speaker (Mr. Michael Morris)
Order. I am having difficulty in relating the hon. Gentleman's speech to the specifics of the Bill. Will the hon. Gentleman analyse the Bill and not analyse somebody else's speech on a policy which is outside the Bill?
§ Mr. Davies
I clearly fell into the trap of supposing that because another hon. Member had raised an issue, that issue was considered relevant to the debate.
The separation of fiscal and monetary policy is clearly an issue raised by the Bill and the kind of objection that my hon. Friend the Member for East Lindsey made was easy to anticipate in the debate. I shall pursue another issue raised by my hon. Friend. If the Bank of England is given the monetary independence sought by my hon. Friend the Member for Wolverhampton, South-West, should it lose any of its existing responsibilities?
The Bank's two main responsibilities are its supervisory responsibility and its responsibility for the management of the public debt. I do not believe—and the Select Committee made it clear in its report that it did not believe —that the Bank should lose its supervisory responsibility. There is a theoretical conflict between the Bank's supervisory responsibility—the responsibility to maintain the integrity of the banking system—and its responsibility for monetary policy. If there were a systemic crisis and a threat to the liquidity of banks, the Bank might be forced to increase the money supply and relax monetary policy which, on general economic grounds, it might not wish to do. I do not think that that conflict can be avoided. It seems to me that one and the same institution should know where the danger signals lie—and be able to pick them up as quickly as possible if the banks are running into trouble —and should be responsible for taking the monetary measures required to deal with that problem if the need arises.
The same does not apply to the Bank's role of handling the Government's debt—or their cash, if they ever have any. There is a much more fundamental contradiction in 570 respect of that role. I cannot conceive of such a case arising in the foreseeable future, but a Government who were heavily overborrowed and had some difficulty in funding their debt might put considerable pressure on the institution acting as its agent in the financial markets—which would have a fiduciary responsibility to get the Government debt away on the best possible terms—to reduce interest rates. The Bank might feel pressurised to do that to help its particular, rather important client, the Government. In those circumstances, there would be a fundamental conflict of interest, which would be extremely disturbing. If the Bank were given independent responsibility for monetary policy, the Treasury should therefore have to make its own arrangements—internal or by sub-contracting or otherwise—for the management of the public debt in future.
§ Mr. Alistair Darling (Edinburgh, Central)
I will not follow the hon. Member for Stamford and Spalding (Mr. Davies). He made his case at some length and it is not necessary for me to dwell on it, except to say that I do not share his view that the Bill is purely a technical measure. We are addressing complex issues and it is not simply a matter of making a technical decision that one aspect of what is currently the responsibility of the Government should be given over to a reformed Bank of England.
§ Mr. Darling
With respect, no. The hon. Gentleman spoke for quite long enough.
Reform of the Bank of England is necessary whether or not we proceed to the third stage of monetary union. The Opposition have a number of proposals to make, and some criticisms of the Bill. In my view, the Bill does not address five crucial points. The first concerns the governance of the Bank of England itself. We believe that the existing court needs to be replaced by a new monetary policy board that would both reflect the interests of the financial world and manufacturing industry and ensure that there was proper representation from the different nations and regions of the United Kingdom. If—and it is a big "if'—we grant greater autonomy to the Bank of England, its decision-making process must adequately reflect the competing and different pressures in the economy and a wider range of interests must be represented on the governing body than at present. That change is necessary now, whether or not the Bill makes any further progress. The Bill has nothing to say about that and, for that reason alone, it ought to fail.
Secondly, there is the important question of what is meant by independence. An examination of central banks throughout the world reveals that there is no clear pattern—indeed, the word "independence" is overused. Some banks that are considered to be independent are more so in practice than in law, and much depends on their reputation and track record. The German Bundesbank is independent by statute, but has shown itself to be open to persuasion by politicians; yet its reputation remains largely intact. As the hon. Member for Wolverhampton, South-West (Mr. Budgen), the promoter of the Bill, said, the 1:1 conversion rate on the unification of Germany was determined by political factors and opposed by the Bundesbank in principle, although the bank acquiesced in the event. In that case, it could be argued that, because the 571 question was essentially to do with exchange rates—for which Ministers are responsible in Germany—rather than with monetary policy—for which the Bundesbank is responsible—that is not a criticism which can be levelled against the fact that the Bundesbank is an independent central bank.
However, that episode illustrates the inherent tension between exchange rate policy and a policy on inflation. On the other hand, the United States Fed is less independent in legal terms, but it has a high degree of credibility—at least at the moment. Its governing body is appointed by the President, who is a political creature.
Many central banks are said to be independent, but have Ministers sitting on their boards. Canada and Spain are examples of that. They cannot really be said to be independent if the people who can ultimately take away their power are on the board providing the appropriate nod or wink. There is provision in many cases for the Government to override a central bank. New Zealand is a prime example of that and that is the model which the Bill largely seeks to follow.
It is arguable that if there is an override, there cannot be independence. However, I accept that it is the perception of what is likely to happen that is important, rather than what could happen in theory. Put simply, the argument for an independent central bank is that the public trust bankers more than they trust politicians. It is a question of credibility.
It is said that politicians tend to manipulate interest rates to win elections. The right hon. Member for Kingston upon Thames (Mr. Lamont), who was in the Chamber for a short while this morning, was good enough to admit in his resignation speech that this Government did manipulate interest rates for political purposes. Despite the protestations of the present Chancellor, I do not believe that the Government will be able to resist the temptation to use whatever mechanisms they can to try to manipulate victory at the next general election, given the linkage between our interest rates, short-term rates and mortgage rates.
It is argued that bankers, who, it is said, take a long-term view, would be more likely to conduct their interest rate policies to secure price stability. Proponents of that style of independence argue that bankers do not have political views. That seems to be a matter of academic theory rather than practical experience. However, it illustrates the point that if the Bank is to have greater autonomy—and in any event—the membership of the court or monetary policy board must have a far wider membership base than at present. It is not so much the constituencies from which the members come that matters, but their calibre. It is important to have a far greater range of experience than is presently the case.
Independence is an inappropriate term. We should be talking about the appropriate mechanism employed by the Government to operate their monetary policies. Changing institutions does not change the economic culture of a country. The fear of high inflation in Germany, born of the German experience of the 1920s, is the reason why the Bundesbank is probably still trusted more than German politicians. There is no guarantee that an independent central bank in Britain would remove an inflationary tendency. The performance of Mr. Viktor Gerashchenko is a startling example of that.
Reference has been made to the Bank's quarterly report which is a very welcome institution. We will watch with 572 interest to see what it says in future. In an intervention on the hon. Member for Wolverhampton, South-West, I said that it would be interesting to see what happens if the Government do not reach their inflation target of 2.5 per cent. by the end of this Parliament. Some have unkindly said that the inflation rate will be closer to 3 per cent. and perhaps higher.
Will the Bank fire a warning shot? We and others will watch with interest to see whether it does. The test of credibility will be whether the Governor is prepared to say bluntly that he thinks there is a problem and does not resort to the form of words so familiar in this country in order to avoid a conflict, or apparent conflict, between the Governor and the Chancellor at what might be a sensitive time.
Interest rates are not the only thing that influence inflationary pressure. The Bill, with its notion of a contract —at least that is what I assume clause 3 means—recognises that other factors apply. Nearly every central bank in the world can be influenced by its Government, either through the appropriate representation on the board or through specific overriding provisions.
I assume that article 107 of the Maastricht treaty was drawn up with that point in mind. It is explicit and states that banks cannot "seek or take instructions" from the Community or national Governments. There are many ways around "seek or take instructions" which would achieve the purpose that many Governments now wish to achieve. They can influence their banks indirectly rather than directly.
Section 4 of the Bank of England Act 1946 is overt. It is quite clear. If we remove it, that would not exclude the appropriate nod or wink in the right club or golf course. The Bill proposes the substitution of a contract, which is another way round the problem.
The Centre for Economic Policy Research report, which has been referred to, chaired by Lord Roll, recognised the problem, which is why it proposed a limited power of override and a very narrow remit. The New Zealand model, in the terms of the Bill, envisages a contract which can be varied. Over the next few years, it will be interesting to see the experience of the New Zealand Government.
I am not condemning that solution out of hand. I am simply saying that the Bank cannot be independent and not independent at the same time. As I have said, independence is the wrong concept. Putting the Bank on a proper footing might be a more appropriate manner of dealing with the problem.
There is another important point, and that is the override. The override provisions are rather like having a nuclear bomb—one can use it in theory, but in practice one knows that one never can. Once it became known, and it would become known very quickly, that the Governor proposed to override the Bank, the consequences on the currency would be catastrophic, which might be helpful in negotiations between the Governor and the principal Finance Minister, but only as long as the Governor thought that the ultimate deterrent would be used.
In theory, we have that situation now. If it were thought that the Governor would resign, the Government would be in substantial difficulties, as would our currency. There is no accountability in that way unless we can use it and we are prepared to use the mechanisms provided for.
There is no doubt that there is a stateable case for a reformed central bank in the United Kingdom. There is something in the credibility argument, whether we like it or not. It is a counter-inflationary force locked into the 573 system, although it has to be said that there is no evidence that a central bank's independence is a necessary condition for achieving low inflation rates. However, from examination, it is clear that there appears to be a premium, although we do not know exactly how much it is. Of course, there is the argument about causation, having regard to the political and economic culture that prevails in countries with independent central banks.
The third criticism of the Bill arises from accountability, which is crucial. The hon. Member for Worcestershire, South (Mr. Spicer) mentioned the growth of quangos in the United Kingdom. Perhaps today, only 24 hours after publication of the report of the Public Accounts Committee, which provided such a resounding condemnation of what is happening in quangos that the Government have set up, we should not skip over that matter.
Indeed, the Chief Secretary to the Treasury and the Financial Secretary, who appear to have given up their economic policy and are now given to discussing matters of moral philosophy, might reflect on the fact that quangos, which are now responsible for much Government administration, are not accountable to the House. If one cannot sack someone, he or she is not accountable, to put it crudely. We cannot be satisfied with handing power to the Bank of England in any form unless we address accountability. I do not think that accountability would be met by the sight of the Governor of the Bank of England being doorstepped by the tabloid press every time he put up interest rates. He might be accountable to the press, but he certainly would not be accountable to the House.
Let us acknowledge that the Bank of England is not accountable to Parliament now in practice, although it clearly is in law, at least in constitutional theory. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) said, many successful independent central banks throughout the world are part of a general constitutional settlement which we do not have. The United States Fed is part of the United States constitutional structure, and the Bundesbank in Germany is in a similar position. Both countries have written constitutions which we do not have. Nomination to the central bank council for the Bundesbank rests ultimately with the Bundesrat, which represents the German Lander, which is part of the in-built checks and balances on the federal Government. We have nothing like that in this country.
In theory, the Chancellor answers to this House, usually after the event. In practice, Ministers will do everything that they can not to answer a question. It was interesting to hear the Chief Secretary this morning trying to sidle out of the commitment that he and his party gave on tax cuts. He is now almost suggesting that they said nothing of the sort. There is a tendency for Ministers to say that, no matter what the policy is, it was nothing to do with them and they knew nothing about it—it is somebody else. The Bill would provide a convenient scapegoat if the need arose.
Of course, the Treasury Select Committee can embark on some cross-examination, but it has a roving role—it is not just to supervise the Bank of England. That point was made by my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott). How many times have Select Committee reports been debated in the House? If 574 any autonomy is to be given to the Bank in this matter, it is absolutely essential to have greater accountability. The Bill has nothing to say about that matter, as far as I can see.
Fourthly, what about the Bank's terms of reference, which are absolutely crucial? Again, there appear to be two models. The Bill proposes a narrow objective of maintaining stability in the general level of prices, although there is clause 5 to which I shall return.
Other central banks are also instructed with regard to the aims and objectives of the general economic policy of their country. The Bundesbank is charged with supporting the general economic policy of the federal Government. The terms of reference of the United States Federal bank contain an injunction to promote effectively the goal of maximum employment. The New Zealand model—that is a solution designed for New Zealand and, as hon. Members have said, we should be wary of importing other countries' models and hoping that they will work here—has the concept of a contract. That is an odd concept, although I would not dismiss it out of hand.
The terms of reference are crucial because they raise the question of economic philosophy. That was touched on by Sir Brian Hopkin and Sir Douglas Wass, who pointed out that monetary policy was only one of many instruments that have a bearing on inflation. Government borrowing, taxation, competition policy and pay all have their part, as they said in an article in the Financial Times on 22 January. I think that the hon. Member for Lindsey, East (Sir P. Tapsell) might have been quoting from that article in his speech. The article continued:if meeting inflation is so important and the politicians cannot be trusted to give it the priority it deserves, logically we should take out of their hands not only monetary policy but a range of other policies as well.Clause 5 seems to hint that a broader consideration would be possible. It is not clear exactly what is in mind, but, in any event, as has been conceded, it is an exceptional step. Indeed, it is doubtful whether it could ever be used because its consequences could intervene before it could be used. If politicians, as it is said, are tempted to manipulate interest rates to win elections, why should not the same politicians manipulate fiscal policy? That could be done at the same time as they are telling downright untruths about what they intend to do. We have some recent experience of that in this country.
It is difficult to see how the Government and the Bank could pursue objectives which could be quite different from time to time, such as the competing demands of the price of money and perhaps the need to keep the exchange rate down. There is an inherent conflict there which needs to be addressed.
Finally, there is the question of regulation, which cannot be ignored. The Bill does not deal with that, and it should do. We believe that the time has come to give responsibility for the supervision and regulation of the banking system to a separate body.
I do not accept the conclusions reached by the hon. Member for Stamford and Spalding or by the Select Committee. While the steps taken by the Bank of England which are contained in the memorandum submitted in the appendix to the Treasury reports are welcome, I do not believe that they go far enough. I also do not believe that a review of the Bank of England's functions and constitutions can be conducted in isolation from its regulatory functions. The collapse of confidence in the 575 regulatory system in the financial services industry means that a review is long overdue, although the Government have not got around to accepting that yet.
The increasingly blurred distinction between banks and building societies which want to become banks; insurance companies and banks that want to become insurance companies; and other people operating in the field mean that the time has come to embark on a thorough review of the whole regulatory system.
§ Mr. John Watts (Slough)
The hon. Gentleman will know that the Treasury Select Committee is about to embark on a wide-ranging inquiry into financial services regulation. That will encompass all the matters to which the hon. Gentleman has referred, and, once again, will address the question whether the supervision of the banking system should remain a Bank of England function. In the report that is before the House today, the Committee made it clear that it would be reverting to that question in the context of wider financial services regulation.
§ Mr. Darling
I am grateful to the Chairman of the Select Committee for his brief commercial. I am well aware of the review on which his Committee is about to embark and, as the hon. Gentleman will know as he attends most of these debates, that is a theme that we have been pressing for the past 18 months.
It is most unfortunate that, while the Opposition would like an examination conducted and while the Committee has agreed to do that, so far the Government have not shown much interest in the matter. Perhaps the Chancellor has not got round to reading some of the difficulties which are now arising. There are concerns that are shared by hon. Members of all parties, as a recent debate on insider dealing showed. It is a matter, not just for the Select Committee, but for the Government. There are undoubtedly substantial problems in the regulatory system which the Government need to address.
We are continuing our examination of the constitution of the Bank. For that reason and in the light of the criticisms that I have made, we shall not support the Bill. Hon. Members who have spoken in the debate so far have referred to the cause of an independent central bank as fashionable. I do not know whether it is fashionable or not, but I am certain that we should not rush into something until we have considered all the consequences and taken the opportunity to examine the problems that exist with the Bank of England now, let alone any that may arise in the future.
§ The Financial Secretary to the Treasury (Mr. Stephen Dorrell)
I begin by welcoming the statement that my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) put in clause 2 of his Bill of the primary objective of monetary policy as he would see it in the context of the reformed Bank of England that he wishes to create. That is a fundamental about which there is much greater agreement in the House than previously and certainly fundamental agreement between my hon. Friend and the Government.
It must surely be the lesson of our history as well as the lesson that should be drawn from the experience of other countries, that there is no trade-off between growth and price stability. Price stability is what creates the circumstances for maximising economic growth. It is the 576 most benign environment that one can create in terms of monetary policy for the creation of wealth. So I whole-heartedly welcome the commitment in my hon. Friend's Bill to that primary objective.
The primary objectives of monetary policy are much less a matter of argument now within the House and outside than previously. It would be surprising if they were still the subject of argument in the way that they were. We must surely be assumed to have a responsibility to learn the lessons of our experience.
In the past 20 years, three times we have seen inflation rise to levels at which the Government had to take action to bring it down. We have seen three times in that 20-year period the damage that is done to the wealth-creation process and the social fabric by the process of bringing inflation under control. So to those people who say that the Government should pay more attention to social and economic damage caused by recession, I say amen, but please understand why recessions happen and the most important proximate cause of our most recent experience of recession—the failure of Governments to deliver price stability and good monetary discipline.
§ Ms Abbott
On that point, I draw the attention of the Minister to a recent academic study in the Cambridge Journal of Economics by Stanners which ended with the conclusion:No evidence has been found to support the notion that a low rate of inflation has in the past and in various countries been associated with improved growth rate".
§ Mr. Dorrell
I cite two bits of evidence to the hon. Lady. The first is the evidence of experience. The experience of low-inflation countries has been better growth than that of their low-inflation comparators. The second is the evidence of analysis. It is not difficult to understand why it is easier to run a business wealth creation process against a background of monetary certainty that allows long-term planning and allows time for investments to repay the investors. It is easier to do that against a background of price stability than against a background of the short-term planning horizons that are imposed by the stop-go economic cycle.
I simply do not accept the hon. Lady's proposition. The evidence of both experience and analysis supports the assertion that price stability is the best circumstance that monetary policy can create for the generation of wealth. Of course it is true, as my hon. Friend the Member for East Lindsey (Sir P. Tapsell) said, that price stability is necessary but not sufficient. Other aspects of economic policy are important to the process of wealth creation. They are not immediately relevant to my hon. Friend's Bill. As I do not intend to speak for very long, I do not propose to talk about them.
For the purposes of the debate, it is common ground at least among everyone other than the hon. Member for Hackney, North and Stoke Newington (Ms Abbott), that price stability is a shared objective. The question is how best to deliver the objective of price stability in our society.
In introducing the Bill, my hon. Friend the Member for Wolverhampton, South-West was at pains to argue that it represented a modest incremental development of existing institutions. He stressed that it was not an attempt to introduce a new and foreign idea—a fancy foreign scheme for managing monetary policy—but an inch-by-inch development of an existing institution. I want to come back to that point, because I do not believe that the Bill is 577 accurately characterised in those terms. Before I do, let us be clear that, however modest or immodest the development envisaged in the Bill, it is clearly in an identifiable direction: of something called independence. It has been qualified that it is towards a more independent monetary policy institution and a more independent central bank.
As many hon. Members have said, these are familiar and perhaps even fashionable arguments. They have been deployed and, indeed, accepted by Governments in New Zealand relatively recently, and the new Government of France. They have been advanced in the House, most notably in recent years by former Chancellors of the Exchequer, who have sought to learn from their experience about how monetary policy could be better managed. The hon. Member for Edinburgh, Central (Mr. Darling)—I think that I quote him correctly—said that he thought that there was something in the direction of institutional development on monetary policy towards greater independence. The arguments can broadly be summarised: it frees the conduct of monetary policy from day-to-day political interference. As the hon. Member for Edinburgh, Central put it, price stability is better delivered by bankers than by politicians. The depoliticisation of monetary policy is one of the strands of the argument that is put in favour of a more independent central bank; the other is the argument of experience—that if one looks at the experience of other countries, one concludes that a more independent institution tends to be more successful at delivering the objective of price stability.
As I have said, those are familiar arguments. I think, however, that even if the Bill is only a modest development in that direction, it is important for us to consider briefly the strength of the argument in favour of going down that road. It is, of course, as one or two of my hon. friends have pointed out, not open to Government to argue that it is inconceivable for us to proceed down the road towards greater independence. As my hon. Friend the Member for Wolverhampton, South-West said, the Maastricht treaty allowed the possibility that we might see more independent conduct of monetary policy.
I do not propose to get involved in arguments about the Maastricht treaty, but when I arrived in the House this morning and saw my hon. Friends taking their places, I did have a great sense of déjà vu. There is no hour of the day in which I have not been in the company of my hon. Friends, who sat in similar places in the Chamber, engaged in the debate about the treaty. I do not propose to go back over that ground this afternoon. I simply want to observe that it is clearly not open to the Government to say that it is inconceivable that we should have a more independent institution conducting monetary policy. Furthermore, that is true, in the context not only of the Maastricht debate, but of the changes that the Government have made in the conduct of monetary policy since 16 September 1992.
The publication of a report on inflation prospects by the Bank of England—it is entirely the responsibility of the Bank of England, and is not something agreed with the Treasury—is a small step in the direction of greater independence for the Bank of England on monetary policy. The decision announced in the autumn of last year by my right hon. and learned Friend the current Chancellor of the Exchequer—that, henceforth, the Bank of England would 578 be responsible for the timing of interest rate changes—is a further step in the direction of greater independence for the Bank of England. The position currently is clear. I think that that answers the point made by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), that one must be clear about who is responsible if the accountability mechanism is to work. Where that responsibility currently lies is clear, because the Chancellor is responsible for fixing the level of interest rates and the Bank of England is responsible for managing the announcement of any change in those rates.
§ Mr. Beith
The hon. Gentleman's explanation might be misunderstood, because one might assume that the Bank acts as a press officer for the Chancellor. Surely the hon. Gentleman would like to add that the Bank is expected to give advice to the Chancellor about whether interest rates should go up or down and by how much.
§ Mr. Dorrell
I accept that the Bank gives advice to my right hon. and learned Friend on that subject, but it is not the only source of advice on monetary policy.
When the right hon. Member for Berwick-upon-Tweed reads his speech in Hansard, he might pause for a second, because I do not believe that the doctrine that he included in it lies at the root of parliamentary democracy. He suggested that responsibility should lie with the party that gives advice. That is a very strange constitutional doctrine and it is not one which I would espouse. According to his argument, responsibility should always lie with civil servants, because we receive advice on monetary policy from those working at the Treasury, as well as advice from the Bank. I stand firmly by the description of responsibility which I gave—the Chancellor fixes the level of the interest rates and the Bank is responsible for the management of the changes to them.
§ Mr. Jenkin
Does my hon. Friend agree that if the Bank of England gave primacy to domestic monetary targets in its policy-setting agenda and the Government chose to give primacy to other targets, such as the exchange rate, that would lead to real conflict between the Treasury and the Bank of England?
§ Mr. Dorrell
It is undeniably true that if one institution looks at one set of indicators to govern monetary policy and another institution looks at another set, it is possible that they will come to different conclusions. The important point is that monetary policy in Britain today is conducted on the basis that the Government are responsible for setting out clearly the parameters of monetary policy. That is the responsibility of my right hon. and learned Friend the Chancellor, because he is responsible for fixing the rate of interest and the Bank is responsible for managing changes in that rate.
It is not part of my argument that it is inconceivable to move in the direction of greater independence, but, since we are considering a Bill which pushes us a long way down that path, we should also remember that arguments exist that should apply pressure to the brake on that process as well as to the accelerator.
I entirely agree with my hon. Friend the Member for East Lindsey and others who have emphasised that it would be dangerous for us to allow ourselves to believe that any institution responsible for managing monetary 579 policy, or any set of institutional arrangements, are panaceas, which by themselves guarantee the delivery of price stability.
Few difficult political problems lend themselves to an institutional solution alone. As my hon. Friend the Member for Stamford and Spalding (Mr. Davies) pointed out, the Japanese experience of price stability has been extremely good, despite the fact that its central bank is clearly subservient to the Ministry of Finance. I seldom agree with the hon. Member for Brent, East (Mr. Livingstone) about anything to do with economic policy, but he was right to say that one of the problems for Russia is the independence of its central bank. It is clear that institutional change is seldom a panacea.
When my hon. Friend considers his Bill, which would create new institutions to manage the day-to-day aspects of Government business, he must accept that it is important to ensure that those institutions are accepted not just in different parts of the House, but by the country, as legitimate in terms of the exercise of the power that they would be given. Institutional legitimacy, surely, is an important criterion in the testing of any such changes. [HON. MEMBERS: "Hear, hear."] Before my hon. Friends become too excited, let me draw an important distinction between the doctrine that institutions must earn legitimacy —which I whole-heartedly espouse—and the doctrine advanced in similar circumstances roughly 12 months ago, which states that independent central banks are in a sense inconsistent with democracy. I do not accept that argument.
It would be absurd to argue that Switzerland, Germany and the United States are not democracies; clearly they are. The difference between our arrangements and theirs is this: they have a separate set of arrangements for the conduct of monetary policy that have become legitimate—to which their populations have become accustomed, and which are accepted in their societies. It is not a question of which set of arrangements is more democratic; it is a question of which set of arrangements is accepted, having earned legitimacy following a period of experience.
§ Mr. Darling
The Financial Secretary appears to be doing the relatively easy job that I did earlier—that is, criticising the Bill. What is his feeling on the principle? Do the Government support moves towards an independent central bank? I detect a distinct lack of enthusiasm on the Financial Secretary's part, and I assume that he is speaking for the Government rather than for himself.
§ Mr. Dorrell
I certainly seek to speak for the Government. The Government's view on the principle was set out by my right hon. and learned Friend the Chancellor when he described himself as an agnostic on the subject; but neither of us is an agnostic when it comes to the proposition that any change must be justified. It must be shown that the change that is recommended would lead to an improvement in the performance of the institution, and to acceptance of that institution in the House and outside.
§ Mr. Forman
May I clarify that important point of policy? The implication is that the Government could be persuaded of the wisdom of establishing a more autonomous central bank on a new statutory basis.
§ Mr. Dorrell
I do not think that we envisage that happening in the foreseeable future. When I was asked about the principle, I said that I thought we were agnostic.
580 Surely, rather than becoming involved in a long argument about what new arrangements may be established, we should ask ourselves what, if anything, is wrong with the existing institutions, and how they can be improved. That strikes me as a more informative and interesting way of dealing with institutional change. It is better than starting with a blank sheet of paper, and asking how we would manage monetary policy if we were setting up a new polity.
§ Mr. Budgen
May I remind my hon. Friend that the Chancellor did not talk about democracy when he last spoke about the matter, on 16 December? He said then:I have an open mind on the subject, although people try to guess my opinion. I have a feeling that the Select Committee's proposal is becoming rather a fashionable cause. We should consider it with care, also taking into account such matters as parliamentary accountability for an increasingly more autonomous Bank of England."—[Official Report, 16 December 1993; Vol. 234, c. 1257.]There was no talk of democracy, whatever that may mean in a constitution with a sovereign Parliament; the Chancellor is worried about accountability. How could a central bank in Europe be accountable to this place?
§ Mr. Dorrell
As my hon. Friend well knows, my right hon. and learned Friend the Chancellor was referring to possible developments in response to the Select Committee report in a domestic monetary context. He was not talking about any move in the European context. As I have said, we have debated that subject many times, and I do not wish to return to it today; it is not germane to my hon. Friend's Bill.
Before we proceed to change arrangements on the conduct of monetary policy, we have to ask the difficult question: would the institution be accepted as legitimate in the House and outside when it made unpopular decisions, which those responsible for monetary policy occasionally have to make? Monetary policy, as we have all agreed, is a vital part of economic policy. I said that I accepted the importance of price stability as a vital precondition to economic success. If we are to deliver price stability, the institution in charge of monetary policy has to be able to take unpopular decisions and to have them accepted in the House and outside.
To put it in plain English, how would people outside the House regard what they perceived to be as an independent central bank putting up interest rates? In particular, how would they regard it if, when the issue was challenged in this place, the answer given was, "That's not a matter for me, but for Eddie"? That would not be accepted as a legitimate answer to that question, either in the House or outside. On that basis, it is important to remember the restriction on the pace at which we should allow ourselves to proceed in developing independent monetary policy institutions. It should remind us of the importance of going slowly—it is on that subject that I want to return to the Bill.
The question that the House should ask itself is whether my hon. Friend is right to characterise his Bill as a modest move in the direction of central bank independence. I think that he is understating the substantial change that would be introduced by his Bill. His argument that the Bill involves only a modest change is based on the argument, set out in his article in The Times yesterday that under his proposalthe Chancellor remains the minister responsible for monetary policy.That would be true only if the House were to accept a regime where the Chancellor sets objectives under the 581 terms of clause 3, which involves policy targets. A regime that requires the Chancellor to set those policy targets allows him to answer the full range of monetary policy questions that might be posed either here or outside. It implies that the only political interest in monetary policy is in the objectives of monetary policy, rather than in the day-to-day judgments that are inherent in converting those objectives into actual interest rates and monetary policy decisions. My hon. Friend's argument is that the Government define inflation targets and the Bank interprets those monetary policy targets into a given level of interest rates.
According to the doctrine of the right hon. Member for Berwick-upon-Tweed, the Government are responsible for those targets. The Bank, in my hon. Friend's model, is responsible for the judgments in interpreting those targets into interest rates and is an independent entity which is not responsible to the House for those judgments. I do not accept the assumption that underlies the Bill, which is that there is no political interest or, indeed, scope for political argument about the judgments necessary to interpret an inflation target into interest rates. That is not the correct interpretation. There is plenty of scope for different people, believing that they share the same commitment to the same inflation objective, to come to different judgments about how that inflation objective should be converted into, primarily, interest rates and other monetary policy instruments given a particular set of circumstances. The importance of that question was underestimated by my hon. Friend when he presented his Bill.
My hon. Friend says, "Oh well, do not worry about it because clause 5 allows the Government, if they do not like what the bank is doing, to move the goalposts." With respect to my hon. Friend, it is not as simple as that. Even if the Government move the goalposts under the terms of clause 5, the Bill still fixes them in terms of inflation objectives rather than specific interest rates. Even after the Government had secured the consent of the House, clause 5 would allow the goalposts to be moved. Clause 5 allows scope for different judgments about how the inflation objective is converted into interest rates.
My hon. Friend the Member for East Lindsey is right to stress that a statutory instrument calling for monetary policy to be changed contrary to the public advice of the Governor of the Bank of England, would lead to all kinds of financial stresses in the market. As more than one hon. Member has said, it would be a nuclear deterrent.
The Government do not support the Bill in its present form, because its key provisions would not solve the problems that are inherent in trying to answer the questions that my hon. Friend has set himself. The Bill is a bigger step towards an independent central bank than he has suggested, but it is not part of our case that we have clearly decided that greater independence for the Bank is either impossible or undesirable.
I have agreed with several of the views expressed by my hon. Friend the Member for East Lindsey, but I do not agree with his view that it is necessary for fiscal and monetary policy to be the responsibility of the same institution. It is technically possible to resolve the problems, but whether we want to do so is a different question; and if we do, how fast do we want to make the necessary changes?
§ Mr. Duncan Smith
My hon. Friend says that the Government do not necessarily rule out greater independence, but have not the Government ruled it in? Their recent changes mean that they have already started on the route towards greater autonomy. Surely the question is how far the Government are prepared to go.
§ Mr. Dorrell
I said that this is a process on which the Government have already gently embarked, but that the way in which we intend to proceed is by starting with what we have and asking how it can be improved, not by starting with a clean sheet of paper and asking how it might be done in a perfect world. We always bear in mind the important constraint that whatever emerges from the process must be accepted as legitimate here and outside. In plain English, when interest rates go up, the arrangements must be such that people do not say that the Government are trying to get out from under or that the institutions are in some sense illegitimate.
My hon. Friend is to be congratulated on what he has described as a probing Bill. It deals with an interesting subject and has presented the House with a valuable opportunity to debate the issues. However, I cannot commend the Bill in its present form.
§ Mr. Ken Livingstone (Brent, East)
If the Bill were to become law it would be one of the most pernicious attacks on the people of this country in many decades. That is because the Bill recommits the Tory party, which clearly sees the next election hoving into view, to fundamentalist Thatcherism and monetarism. The legislation would inevitably mean permanent, institutionalised higher unemployment throughout the length and breadth of this country. That is because it would reassert the primacy of price stability over every other social and economic objective.
The disaster of the past 15 years of politicians assuming that a couple of lines of economic theory could be turned into a religious creed to which everthing else was subordinated, shows that some Conservative Members have learnt nothing from the lost opportunity of the past decade and a half. Therefore, I am surprised that the Government Whips have instructed their Back Benchers to ensure that the Bill is talked out.
The reality is clearly spelt out in the Bill's introduction, which in a sense tries to capture the flavour of what is behind the measure and its attempt to win support in the city. The Bill's objectives are,to remove the general power of the Treasury to give directions to the Governor of the Bank; to establish price stability as the primary objective of the Bank and to provide for policy targets for the carrying out of this objective;".All the City interests, whose interests have dominated the past 15 years of Conservative Government, would be delighted for that to be enshrined in law, but what would it mean in practice?
We are asked to trust the bankers. I have nothing against bankers as a group. I am certain that they would make good neighbours if they lived next door. They probably would not play their reggae music in the middle of the night or kick one's cat, but what is distinguishing about bankers that makes their judgment any better than that of any other group in society? Is it simply the failure of successive Governments to regenerate the British economy and move us into the realms of the average modern European economy, with the levels of social and economic provision 583 that others are able to afford, and the failure of British Governments to achieve that during the past 40 years, that leads some people to cast about desperately for some new institution or group—in this case bankers—who can be given power so that they will be able to create what successive British Governments have failed to create?
It would be much better to analyse why British economic policy has failed during the past 40 years—of course, I do not include the post-war Attlee Government in that record of failure—rather than to thrash around, not considering policy but seeking some new institution that can do it all for us.
I do not think that bankers are impartial. All the history, in this country and other countries, suggests that bankers, as a group, are characterised overwhelmingly by a cautious and narrow approach to their sector of responsibility. Occasionally, there is a slightly more radical or progressive banker, but overwhelmingly it is a cautious little group and, frankly, they do not balance the competing interests of society, and that is not their job.
The job of bankers is primarily to try to maximise the return on the money that has been entrusted to them. Increasingly in Britain that has been perceived as a short-term role. They have not taken on board any national responsibility and our law enshrines that they cannot do that. They simply have to think in terms of the quickest possible return for the investors to whom they are responsible and accountable.
Let us consider the idea that is creeping forward of the independent central bank. I was amazed to hear the Financial Secretary speak about the Government's open mind. A treaty has just passed through the House which commits us to making the Bank independent. They have signed the thing. Now I am not surprised that people are backing off, in the tatters of the Maastricht treaty, but night after night we witnessed the Government Whips dragooning Conservative Members through the Lobbies to win support for a treaty which, by law, forced the British Government to denationalise the Bank of England. It is rubbish for the Government to say, "We are giving the matter some thought" or, "We are open-minded" or, "a bit agnostic" when they have spent virtually the whole of this Parliament so far trying to carry into law a treaty that forced them to create an independent central bank.
No doubt the prime force is that Members of the House consider other nations that have had more successful economic policies and say, "There is an independent central bank element to their success. If we could have an independent central bank we could be the same."
My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) pointed out the success of Japan. Japan consistently ran very high inflation until it established the basis of its growth. The Japanese central bank is independent. There is a much more collective form of policy-making and task-setting in terms of Japanese political leadership.
Increasingly, though, people have tended to point to the Bundesbank or the Federal Reserve bank in the United States. The example of the Federal Reserve in the United States should be a warning to Opposition Members. If one considers recent history, the Federal bank in the United States became truly independent during the Truman presidency. Before that, right up to Roosevelt's time, the bank did pretty much as it was told by the President. It was only when the cost of funding the Korean war became so inordinate that the American Government could no longer 584 obtain funding from the markets for the cost of the deficit that was built up by the Korean war, that suddenly the balance of power shifted and the Federal Reserve bank started to assert some independence, on which it has built since.
People on the left of the political spectrum should consider recent history. When President Carter was faced with a severe and persistent recession and wished to relax the Federal Reserve's policy and reduce interest rates, the bank's board of governors refused to co-operate. Jimmy Carter went into an election that he was doomed to lose because of the economic constraints. A decade later, George Bush was equally stuck with a long and persistent recession but the Federal Reserve was happy to cut interest rates in the most manic way. It clearly did everything possible to ensure the re-election of a Republican President. I am not surprised that a group of bankers in any society is going to be broadly sympathetic to parties of the right, and the case I have just cited is the clearest demonstration of that in recent times.
The Bill is the first step towards the creation of an independent central bank. If we were to create such a bank, how would it be governed? The Opposition parties would demand to be able to nominate a proportion of the members of the bank's governing body. That would be very different from the current situation. We read in the newspapers that Lady Thatcher had appointed Robin Leigh-Pemberton as Governor of the Bank of England and no one else had a say.
The reality of Lady Thatcher's premiership was good, clear accountability: Robin Leigh-Pemberton was appointed because he would do what he was told. He was completely and utterly a creature of the Government or, to be precise, of the Tory party. In the run-up to the 1992 general election, he virtually gave a free party political election broadcast for the Tories, telling the people that the recession was over. I did not object when Mrs. Thatcher appointed Robin Leigh-Pemberton. She wished to appoint as Governor someone who was clearly her creature and it was her right to do so because, at the end of the day, if the Bank got the policy wrong she would lose her job. That is what political accountability is all about.
I believe that Governments try to do far too much. Many of the things for which Governments have responsibility should be devolved to regional parliaments and local authorities. We all agree that Parliament and the Government should be responsible for foreign policy and for defence, but how can anyone deny that macroeconomic policy should be the preserve of the Government and Parliament of the day? I am all in favour of more transparency in how such decisions are taken, but, rather than have the Bank present a banal report every few months on what it is doing, it would aid accountability and transparency on questions of how interest rate policy was evolving if the Chancellor came to the House when the Bank wished to change the interest rates. Why should not the proposed new rates be announced to the House? We could then debate the issue and all hon. Members could have some influence.
I do not know why I have driven from the Chamber the Front-Bench spokesmen of both parties. I wonder whether a coalition Government is even now being formed because of the horrifyng prospect of what I am saying. This is one of those rare times when I am in complete agreement with my party's Front-Bench spokesman, and such occasions 585 give me great pleasure. Like many of the best pleasures in life, it is becoming increasingly infrequent as the years roll by.
We should be aware of what the Bill would mean for the people whom we represent. There is not the slightest doubt that it would be bad news. I was delighted to find that my reminding the House of what happened in Russia pleased the Financial Secretary. The truth is—[Interruption.] I do not know what is going on, but I am beginning to wonder whether I might be in a state of dishevelment.
We have only to consider what is happening in Russia today to realise the problems arising from split accountability for the management of the economy. The governor of the central bank there is pursuing a policy that is completely at variance with the elected President's economic policy, and it has been disastrous.
It is all very well for the Bill to say that the Government of the day could, in effect, issue an edict that will run for six months, but what would be the impact on the money market while that was being debated in Parliament? What would it cost the British Government in a possible drain on the pound if it were known that, while the independent Bank of England was favouring one policy, the Government of the day were having a public debate and a vote in the Chamber one or two or three days hence to impose a policy to which the Bank was opposed? It would mean a collapse in confidence.
That is the pernicious sting in the tail of the Bill. While it gives the illusion of accountability, it transfers power. How many Governments would have the nerve to run the risk of one, two or three days of a haemorrhaging of resources from Britain, as the international money markets panicked at seeing the central bank and the Government locked into disagreement and conflict? That would be a disaster. I want to see greater accountability on the Floor of the House—that means clarifying how political accountability works.
I had a vivid example of such accountability when I was leader of the Greater London council. As elected council members, we inherited a transport arrangement with an appointed London Transport Executive, which had responsibility for the day-to-day running of the transport system. Often we were in agreement and often we were not. When the first Labour administration after the new arrangements took office in 1973, there were horrendous rows, conflicts and sackings. It always seemed as if there was no reason for an elected council and a full-time executive of London Transport to run London transport. There was a tremendous overlap in that capacity and there was confusion and dissent. Londoners were the losers in the end because of that blurred accountability.
I was impressed by a book that I read about 30 years ago —an autobiography by senator William Norris, who was the senator for Nebraska in the first half of the century. His theory was that it was in the interests of voters to have the clearest lines of political accountability. He campaigned and eventually won a change in the Nebraska state constitution to abolish its system of a Nebraska house of representatives and a Nebraska senate and introduced a unicameral legislature. That meant that if something was not going right, everyone could see where the political responsibility lay.
586 I have not the slightest interest in taking even one step towards an independent central bank, which will lead to a blurring of accountability and a blurring of where blame lies. As my hon. Friend the Member for Edinburgh, Central (Mr. Darling) has said—it may have been said by a Government Member; the parties are rather close on that issue—it would be no valid excuse to say to people "Go and see Eddie". Imagine a difficult financial position, with mounting unemployment and 100,000 or more workers marching up to Trafalgar square demanding action, and someone from the Government of the day says "Don't blame me you have to go and see the Bank of England", It is an absolute travesty.
The House is filled with 651 people who, in the main, have drooled over the idea of becoming a Member of Parliament. In some cases, they have lusted for political power since they were little boys and girls and were photographed outside No. 10 Downing street. They devoted their lives to getting here because they wanted political power. They arrive in the House and decide to give the key decision to the bankers. Why not go off and become a banker in that case? I did not come here to say, "That is a difficult decision. Let some other poor sod take it". I am happy to take those difficult decisions. Part of the problem is that there are too many bankers on the Conservative Benches.
I shall wind up so that another hon. Member may make a brief speech before the Division. I want to outline why the British economy has failed and why the aims of the Bill will not work. The British economy has not failed because it has suffered too much inflation. Inflation has not helped and the economy would have been a lot better if the British rate of inflation had been closer to that of Germany. The economy has not failed because British workers have earned too much money, as they have been almost the poorest paid workers in northern Europe. It has certainly not failed because successive Governments have almost got things right but lost their nerve.
The underlying cause of our economic problems is lack of investment. When the Government came to power, they made a great song and dance about the state of the motor industry, comparing the productivity of Japanese workers in the motor industry with those of their British counterparts. But, for every £1,000-worth of equipment with which British workers in the motor industry were working, Japanese workers had £11,000-worth of equipment at their disposal—a ratio of more than 10:1.
The reason why British Governments have failed to turn round the British economy and replicate the success of Japan or Germany is that we have under-invested in Britain. Through the 1950s, 1960s, 1970s and 1980s, British investment limped along at about 14 or 15 per cent., whereas German investment often stood at 25 per cent. and Japanese investment at 33 per cent. Nothing in the Bill will lead to an extra pound of investment in the British economy.
§ Mr. Forman
Does not the hon. Gentleman realise that the climate for investment over that long period would have been much better had we had lower inflation and less volatile interest rates, and that both would have been helped by the existence of a more autonomous central bank on a new statutory basis?
§ Mr. Livingstone
I ask the hon. Gentleman to examine the success stories. Japan has not had low inflation until 587 recently. It established its economic predominance, often with massive deficits and high inflation, by creating the right climate of opinion. It made itself into a nation that was going somewhere—which was growing and investing. It is largely a matter of psychology. We have created a different climate of opinion: we are a nation obsessed by what is happening in the City of London which sits and watches bankers clawing their 0.5 per cent. off the value of someone else's productive labour. The best and brightest minds come out of our universities and go into the City —into stockbroking and accountancy—rather than into industry, engineering and scientific research. We must change that climate of opinion, and no independent central bank will do it.
If the Bill became law, the message would go out that Britain's financial interests had reinforced their predominance over industry in the British economy. That is why this is a pernicious Bill. I find it amazing that an hon. Member who has earned a lot of respect and who, with good humour, has spent much of the past 18 months trying to prevent the British people from being enslaved by a European cartel of bankers is now happy to truss up his constituents and deliver them bound hand and foot into the power of British bankers. I do not like bankers, whether they are British bankers or foreign bankers, because bankers are not interested in the sort of people I was sent here to represent.
§ Lady Olga Maitland (Sutton and Cheam)
I never imagined that I would admit to the House that I agreed with the spirit—if not with the content—of a speech made by the hon. Member for Brent, East (Mr. Livingstone). Clearly, pigs sometimes fly.
I welcome this important debate and congratulate my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) It is appropriate that he should have introduced the Bill to give us the chance to discuss a very important issue which has been rattling around for years. The opportunity that my hon. Friend has given us to debate the issues is both timely and welcome.
My hon. Friend described his Bill as a tiny step. I would put it in a different way. My hon. Friend the Member for East Lindsey (Sir P. Tapsell) described the Bill as a lever. Could it not also be regarded as a big step for mankind, but not always to everyone's advantage?
I note that the Treasury Committee, of which my hon. Friend the Member for Wolverhampton, South-West is a member, admitted that it had no intention of seeking an independent Bank of England, and my hon. Friend emphasised that in his speech. I think that we would all agree that the issue goes wider than the Bill. Should we set the Old Lady free? Perhaps, but perhaps not just yet. I agree with my hon. Friend the Minister that we should examine the existing institution and consider how it could be improved.
It is not unreasonable to liberalise the ties between the Treasury and the Bank. I believe that accountability is important and that transparency is vital. However, it is a matter of degree. We all agree that it must be a priority to keep inflation down, and for good. Perhaps the best way to look at the effect is to consider how the lives of our constituents would be affected.
My constituents in Sutton are very concerned about the cost of living. Their lives could be shattered if things go 588 wrong. They do not want shocks or sudden price rises which can throw a family budget, particularly if mortgage payments are tight. Pensioners do not want to see their hard-earned savings swallowed up by a rampant rise in the cost of living. Small business men do not want to see resources gobbled up. They all want steady, sustainable growth.
For all that, I do not believe that we should be fearful of examining new ideas which ultimately make for better and perhaps more accountable systems and which need not cause a revolution. That did not happen in 1946 when the Bank of England was nationalised. According to the Bank's official history, that aroused little interest among historians and caused precious little public debate or controversy.
The Bank's history may already have been evolving into the brave new post-war world. Nationalisation may have occurred as a legacy of wartime controls and was given a push by the radical socialist Government, free of any parliamentary constraints. The argument then was that nationalisation was simply a move to regulate existing procedures and that, despite the change in ownership, the Bank would maintain independence in day-to-day management of banking operations.
Even when the Bank was in private hands, the practical relationship between the Bank and the Treasury was complex, with the Treasury generally having the last word. The Bank's directors would consult the Chancellor before deciding on changes in bank rates, even though such changes were formally not undertaken until the directors held their Thursday meeting.
The relationship between the Bank and the Treasury today is, of necessity, something of a delicate quadrille. In the 1960s, the earlier consensus was replaced by a suspicion of the Bank by a Labour Government who disliked criticism of their tax policies and spending plans.
The balance tilted the other way in the 1980s and reached its high-water point of Treasury domination of the Bank. The former Chancellor of the Exchequer, Nigel Lawson, was quoted in The Economist in 1990 as saying in 1987I make the decisions and the Bank carries them out.A turnabout in mood, which surprised commentators, came when Lord Lawson, when giving evidence to the Treasury Select Committee in an investigation into the independent role of the Bank of England, said:I became convinced in my own mind that it would be a better institutional arrangement for the battle against inflation … It was not because I was suddenly struck with the feeling that central bankers were supermen … it was simply that I felt as an institutional arrangement it would work better.Those who work in the Bank may be flattered to be called supermen. However, I do not sense any arrogance judging from the evidence given by the Governor, Eddie George, to the Treasury Select Committee. He did not give the impression of empire building. If that was in his heart, he did not let it be known. He was quite clear when he said that there has to bean accountability mechanism. And it has to be effective.He added that the Bank's euphemism for independence isstatutory accountability, precisely to try to remind ourselves all the time of the point and to try to get rid of this idea that independence, which is the popular name for the debate, is about a lot of appointed bureaucrats exercising … powers.He favoured a mandate from Parliament, giving price stability as the objective.
589 On accountability, it is interesting that the Select Committee report noted that the Prime Minister, commenting on the then Chancellor's support for an independent central bank, said:The very real concern that I have always faced is one that I believe is spread widely across the House: the need for accountability to Parliament for decisions on monetary policy matters. Were a way to be found to get the benefits of an independent central bank without the loss of parliamentary accountability, my views would be very close to those of my right hon. Friend.Are we ready for the Old Lady to cut the apron strings? Is that necessary? Evolution means that it is common sense to operate on a more open basis. Why not allow the public, the press and Parliament to know what the Government's monetary policy is and the extent to which the Bank is given freedom to achieve the Government's stated objectives? It is welcome news that Mr. Pennant-Rea, the deputy Governor, a former journalist and editor of The Economist, will take personal control of the Bank's relationship with the public, Parliament and the press.
Would a lurch to total independence turn into a perfect world? Some say that we should look overseas to Germany and Switzerland—America even—which have good or excellent inflation records. Are we so certain that autonomy means low inflation, or are there other factors? Could it be the management style? After all, the independent Bank of New Zealand brought inflation down, but, at the same time, that country went into recession. Is independence such a conclusive indicator of low inflation? Analysis of the world's leading economies shows that there is hardly any evidence that real growth rates or unemployment performance were superior in countries with more independently constituted banks. The flip side, as pointed out by Edward Balls in the Financial Times in 1991 is thatCountries where the fear of inflation is greatest may be those that give the most independence to a central bank thus denying governments the ability to use monetary policy to stabilise the economic cycle which may actually lead to more variable output and higher unemployment.Surely what count are the decision makers. Clearly, it is more desirable that the Government should take responsibility, if not the rap, if things go wrong. At least we should know how and why they have gone wrong. By the same token, we could give them a good cheer for getting things right. Ultimately, the buck stops with the Government. They decide and co-ordinate tax and 590 monetary policies and report to Parliament. An independent bank would make things very tough, because politicians would be held responsible for an organisation—the bank—over which they had no control in certain respects.
I am not always in total agreement with Lord Healey, but, on this occasion, I have to support him. He gave evidence to the Treasury Select Committee. The report states:the transfer of responsibility for monetary policy to the Bank is essentially a 'gimmick', supported by previous Chancellors of the Exchequer as a way of putting 'major responsibility. onto somebody else'. In this view, the successful conduct of monetary policy 'depends on individuals. I must support him on that matter.
That is not to say that times have not moved on sufficiently for greater openess. It is already happening and it will develop even more. We can see that the relationship between my right hon. and learned Friend the Chancellor and the Governor of the Bank of England is running along very nicely. There is almost the mutual patting of heads—so much so that my right hon. and learned Friend announced that, in future, when decisions on interest rates had been taken, he would leave it to the Governor to decide when to move.
But a word of warning. On 7 January last year, Anatole Kaletsky warned that we cannot always rely on independence as an aspirin for future ills. He told us to bewareof the search for a single 'silver bullet' to deal with all of our economic problems; the eagerness to replicate off-the-peg foreign models; the disregard of practical experience in examining the claims made for theoretical miracle cures.He is not alone in his remarks. Indeed, analysts in the City are not overwhelmed by the notion, and many see no merit in change.
Mr. Neil MacKinnon, chief economist at Citibank, said in the 10 June edition of the Financial Times:In the late 1980s everyone thought that ERM entry would be the answer to inflation. I think it is rather depressing that we are again looking for a holy grail. In the end it boils down to whether we have the right policies or not, and an independent central bank isn't going to change that.That view was echoed in the same article by Mr. Kevin Gardiner, the United Kingdom economist at S. G. Warburgs who said: "I am not sure that an institutional change—
§ It being half-past Two o'clock, the debate stood adjourned.